Example of Economic Order Quantity
Example 1:
Calculate the EOQ from the available particulars,
- Consumption of material per annum: 10,000kg
- Cost of making an order: ₹25
- Cost of raw material per kg: ₹5
- Storage cost: 10% on average inventory
Solution:
D = Unit Consumed = 10,000
S = Ordering Cost = ₹25
H = Inventory Carrying Cost= 10% of 5 = ₹0.5
[Tex]EOQ=\sqrt{\frac{2DS}{H}}[/Tex]
[Tex]EOQ=\sqrt{\frac{2\times 10,000\times 25}{0.5}}[/Tex]
[Tex]EOQ=\sqrt{\frac{5,00,000}{0.5}}[/Tex]
[Tex]EOQ=\sqrt{10,00,000}[/Tex]
EOQ = 1,000
Here, the EOQ = 1000 Kg, which represent the optimum size of an order where the carrying cost and ordering cost will be minimum.
Example 2:
Compute EOQ, when a retail store sells 20,000 units of a certain product annually. The cost to place and process each order is $50, and the holding cost per unit per year is $2.
Solution:
D = 20,000 units (annual demand for the product)
S = $50 (ordering cost per order)
H = $2 (holding cost per unit per year)
[Tex]EOQ=\sqrt{\frac{2DS}{H}}[/Tex]
[Tex]EOQ=\sqrt{\frac{2\times 20,000\times 50}{2}}[/Tex]
[Tex]EOQ=\sqrt{\frac{20,00,000}{2}}[/Tex]
[Tex]EOQ=\sqrt{10,00,000}[/Tex]
EOQ = 1,000