Economic Order Quantity
• Economic Order Quantity (EOQ) is a fundamental concept in
inventory management. It represents the optimal order quantity a
company should purchase in order to minimize the total costs of
inventory, which includes both the ordering costs and the holding (or
carrying) costs.
For the find out the EOQ
2𝐷𝑆
𝐸𝑂𝑄 =
𝐻
D = Annual Demand
S = Ordering Cost
H = Holding Cost
• A company sells a product that has an annual demand of 10,000
units. The cost to order one batch of product is Rs. 50, and the
holding cost per unit per year is Rs. 2. Calculate the Economic Order
Quantity (EOQ).
2𝐷𝑆
𝐸𝑂𝑄 =
𝐻
• Annual demand for the components (D) = 10,000 units
• Ordering cost per order (S) = Rs. 50
• Inventory Holding charges per unit per year = Rs. 2
2 𝑋 10000 𝑋 50
𝐸𝑂𝑄 =
2
1000000
𝐸𝑂𝑄 =
2
𝐸𝑂𝑄 = 500000 = 707.11
𝐸𝑂𝑄 = 707
• An auto industry purchase spark plug at the rate of Rs. 25 per piece.
The annual consumption of spark plug is 18,000 pieces. If the
ordering cost is Rs. 250 per order and carrying cost is 25%. P.a., what
would be EOQ?
2𝐷𝑆
𝐸𝑂𝑄 =
𝐻
• Annual demand (D) = 18,000 nos.
• Unit Price (C) = Rs. 25
• Ordering cost per order (S) = Rs. 250
• Carrying chares (as %) (O) = 25%
2𝐷𝑆
𝐸𝑂𝑄 =
𝐶∗𝑖
2𝑋 18000 𝑋 250
𝐸𝑂𝑄 =
25 𝑋 0.25
90,00,000
𝐸𝑂𝑄 = = 1200 𝑢𝑛𝑖𝑡𝑠
6.25
•
• A Company uses 1200 units per month of an electronic component
each costing Rs. 2. Placing each order cost Rs. 50 and the carrying
cost is 6% per year of the average inventory find the EOQ.
2𝐷𝑆
𝐸𝑂𝑄 =
𝐻
• Annual demand for the components (D) = 1200 x 12 = 14400 pieces
• Unit price of the components (C) = Rs. 2
• Ordering cost per order (S) = Rs. 50
• Inventory carrying charges per year (i) = 6%
2𝑋 14400 𝑋 50
𝐸𝑂𝑄 =
2 𝑋 0.06
12000000
𝐸𝑂𝑄 =
0.12
𝐸𝑂𝑄 = 3464
• A factory uses annually 2400 units of a raw material which cost Rs.
1.25 per unit placing each order cost Rs. 25 and carrying cost is 6%
per year of the average inventory. Find the EOQ.
2𝐷𝑆
𝐸𝑂𝑄 =
𝐻
• Annual demand (D) = 2400 pieces
• Unit Price = Rs. 1.25
• Ordering cost per order (S) = Rs. 25
• Inventory carrying charges per year (i) = 6%
2𝑋 2400 𝑋 25
𝐸𝑂𝑄 =
1.25 𝑋 0.06
1200000
𝐸𝑂𝑄 =
0.075
𝐸𝑂𝑄 = 1264.911
• An auto industry purchase spark plug at the rate of Rs. 25 per piece.
The annual consumption of spark plug is 18,000 pieces. If the
ordering cost is Rs. 250 per order and carrying cost is 25%. P.a., what
would be EOQ? If the supplier of spark plugs offers a discount of 5%
for order quantity of 3,000 pieces per order do you accept the
discount offer.
• Given data
• Cost per spark plug (P) = Rs. 25
• Annual demand (D) = 18,000 units
• Ordering cost (S) = Rs. 250 per order
• Carrying cost = 25% of unit cost
• H=0.25×25=Rs.6.25
Supplier offers a 5% discount for order quantity of 3,000 units
Discounted price = P′=25−(0.05×25)=Rs.23.75
2𝐷𝑆
𝐸𝑂𝑄 =
𝐶∗𝑖
2𝑋 18000 𝑋 250
𝐸𝑂𝑄 =
25 𝑋 0.25
90,00,000
𝐸𝑂𝑄 = = 1200 𝑢𝑛𝑖𝑡𝑠
6.25
•
Cost Comparison with Discount
• A company uses 1200 units per month of an electronic component
each costing Rs. 2. Placing each order cost Rs. 50 and the carrying
cost is 6% per year of the average inventory.
• Find the EOQ
• If the company gets 5% discount if it places single order, should they accept
the discount offer?
• Annual Demand for the component (D) = 1200 x 12 = 14400 Nos
• Unit price of the component (C) = Rs. 2
• Ordering cost per order (S) = Rs. 50
• Inventory carrying charger per year (i) = 6%
2𝐷𝑆
𝐸𝑂𝑄 =
𝐶∗𝑖
2𝑋 14400 𝑋 50
𝐸𝑂𝑄 =
2 𝑋 0.06
1,44,00,00
𝐸𝑂𝑄 = = 3464 𝑢𝑛𝑖𝑡𝑠
0.12
•
14400
• No. of order per year = = 4.15 = 4
3464
14400
• Modified EOQ = = = 3600
4
Case 1: Without Discount (EOQ = 3600)
• 𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 𝑓𝑜𝑟 𝐸𝑂𝑄 𝑂𝑟𝑑𝑒𝑟𝑖𝑛𝑔 = 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑀𝑎𝑡𝑒𝑟𝑎𝑙/𝑌𝑒𝑎𝑟 +
𝑂𝑟𝑑𝑒𝑟𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟 + 𝐼𝑁𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑐𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟
𝐷 𝑄
• 𝑇𝐶𝐸𝑜𝑄 = 𝐷𝑃 + 𝑆 + 𝐶 ∗ 𝑖
𝑄 2
14400 3600
• 𝑇𝐶𝐸𝑜𝑄 = 14400 𝑋 2 + 𝑋 50 + 𝑋 2 𝑋 0.06
3600 2
• 𝑇𝐶𝐸𝑜𝑄 = 28800 + 200 + 216 = 29216 𝑅𝑠.
Case 2: With Discount of 5% (sing order qty =
14400)
• 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡𝑒𝑑 𝑢𝑛𝑖𝑡 𝑝𝑟𝑖𝑐𝑒 𝐶 = 2 𝑋 0.95 = 𝑅𝑠. 1.90
• 𝑂𝑟𝑑𝑒𝑟 𝑄𝑡𝑦 𝑡𝑜 𝑎𝑣𝑎𝑖𝑙 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑄1 = 14400 𝑛𝑜𝑠
𝐷 𝑄1
• 𝑇𝐶𝐷𝐼𝑆𝐶 = 𝐷𝑃 + 𝑆 + 𝐶 ∗𝑖
𝑄1 2
14400 14400
• 𝑇𝐶𝐷𝐼𝑆𝐶 = 14400 𝑋 1.90 + 𝑋 50 + 𝑋 1.90 𝑋 0.06
14400 2
• 𝑇𝐶𝐸𝑜𝑄 = 27360 + 50 + 820.80 = 28,230.80 𝑅𝑠.
• Cost with EOQ = Rs. 29,216.00
• Cost with Discount = Rs. 28,230.80
• Since total cost with discount is lower, then company should accept
the offer.
