ECONOMIC ORDER QUANTITY (EOQ)

Suppose the annual demand for an inventoried item is 1,200 units. The holding cost for it is $3 per unit
per year. The ordering cost is $50 per order.

1. In this problem, D=______________; Co=_______________; Ch=_______________

2. If the current order quantity is Q=100 units per order, then

(a) The total annual ordering cost = Co*(D/Q) = _________________

(b) The total annual holding cost = Ch*(Q/2) = __________________

(c) The total annual inventory cost = _________________

3. Calculate the economic order quantity, Q*, for this problem.

4. With the economic order quantity Q* as you have just calculated,

(a) How many orders will be placed in a year?

(b) What is the total annual ordering cost?

(c) What is the average inventory level?

(d) What is the total annual holding cost?

(e) What is the total annual inventory cost?

5. Suppose the order quantity is Q=300 units per order.

(a) Without calculations, the total inventory cost associated with this order quantity must be
___________ that with Q*, the economic order quantity.

a. higher than b. lower than c. equal to

6. The total annual inventory cost associated with the economic order quantity, Q*, is the lowest
compared to any other order quantities.

a. True b. False

7. At the EOQ, the total annual holding cost is always ___________ the total annual ordering cost.

a. greater than b. smaller than c. different from

d. same as e. None of the above. It depends on specific problems

CASE STUDY

Company KK produces 2,000 bottles of orange juice per year. A bottle of orange juice uses 3 kg
of oranges. Costs of oranges are RM6 per kg. Cost of ordering the orange is RM25 per order and
stock holding cost is 10% per year.

Required:

a) Determine the Economic Order Quantity (EOQ) for the orange using EOQ Equation.

b) Explain the overall objective of inventory control.

Berjaya Cetak Sdn Bhd prints Sunday Times newspaper. The company consumes 36,000 litres
of ink every month. The cost of storing the ink is RM3 per litre per annum. The ordering cost is
RM120 per order
Required:

i. Calculate the company's Economic Order Quantity using the equation method.

ii. Calculate total cost (ordering and storage) for the ink.

Anggun Boutique manufactures bags using denim clothing material. Due to poor cash flow, the
owner of the boutique plans to minimize the cost of material. For each unit of bag, 2 meters of
denim is used. The cost of denim is RM5/meter. The cost of ordering is RM80 per order and the
carrying cost is 5% of the cost of denim.
i) Assuming that the boutique plans to produce 1,200 units of bag per annum, you are required to
compute the economic order quantity (EOQ) for the denim using the tabulation method at the order
sizes of 800, 1,200, 1,600 and 2,000 meters.

ii) What will happen if Anggun Boutique orders the material excessively?

Sara Textiles House is concerned about the stock level of their textiles that appears to be too
low. The textiles are currently ordered in quantities of 200 rolls per order at a cost of RM800
per roll. The demand for the textiles is constant at 1,000 rolls for each quarter. In preparing
the order, the firm incurred RM125 for freight and forwarding cost per order. Immediately
after receiving the textiles, Sara Textiles House insured the textiles at 4% of the inventory
value. Storage cost is RM8 per roll.

a) Calculate the economic order quantity (EOQ) for the textiles.

b) Calculate the annual savings that could be made using the EOQ instead of the current policy of
ordering 200 rolls per order.