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Economic Order Quantity (EOQ) Calculation

Illustration 2.1

Calculate the economic order quantity for material M. The following details are furnished:

  • Annual usage = 90,000 units
  • Buying cost per order = Rs 10
  • Cost of carrying inventory = 10% of cost
  • Cost per unit = Rs 50

Solution:

The formula for EOQ is:

EOQ=2ABCS

Where:

  • A = Annual consumption
  • B = Buying Cost
  • C = Cost per unit
  • S = Storage/Carrying Cost

Calculating EOQ:

EOQ=2×90,000×1050×10%
EOQ=2×90,000×105
EOQ=360,000
EOQ=600 units

Illustration 2.13

Given,

  • Cost of placing order or Buying Cost (B) = Rs 100
  • Purchase price of raw material (C) = Rs 10
  • Re-order period = 4-8 weeks
  • Consumption of Raw materials = 100-450 Kg per week
  • Annual consumption (A) = 275 x 52 = 14,300 Kg
  • Avg consumption of RM = 275 Kg
  • Carrying cost (S) = 20% p.a.

Calculate:

i) Re-order quantity or EOQ

EOQ=2ABCS
EOQ=2×14,300×10010×20%
EOQ=2×14,300×1002
EOQ=1,430,000
EOQ=1195.82 or 1196 Kgs (approx.)

ii) Re-order Level

Re-order Level=Maximum consumption×Maximum re-order period
Re-order Level=450×8
Re-order Level=3600 Kgs

Illustration 2.3

Given,

  • Monthly consumption = 2,500 units
  • Annual consumption (A) = 2,500 x 12 = 30,000 units
  • Cost of placing order or Buying cost (B) = Rs 150

  • Cost per unit (C) = Rs 20

  • Re-order period = 4-8 weeks
  • Minimum consumption of RM = 100 units
  • Avg consumption of RM = 275 units
  • Carrying cost (S) = 20% p.a.

Calculate:

i) Re-order Quantity or EOQ

EOQ=2ABCS
EOQ=2×30,000×15020×20%
EOQ=2×30,000×1504
EOQ=2,250,000
EOQ=1500 units

ii) Re-order level

Re-order Level=Maximum consumption×Maximum level

Calculate the average consumption to find the maximum level:

Avg Consumption=Minimum level+Maximum level2
275=100+Maximum level2
550100=Maximum level
Maximum level=450 Kgs

Now calculate the Re-order Level:

Re-order Level=450×8
Re-order Level=3600 Kgs

Illustration 2.5

Given,

  • Monthly consumption = 1500 units
  • Annual consumption (A) = 1500 x 12 = 18,000 units
  • Cost per order or Buying cost (B) = Rs 150
  • Cost per unit (C) = Rs 27
  • Carrying cost (S) = 20%

Calculate EOQ:

EOQ=2ABCS
EOQ=2×18,000×15027×20%

$$ \text{EOQ} = \sqrt{\frac{2 \times 18

,000 \times 150}{5.4}} $$

EOQ=1,000,000
EOQ=1000 units

Calculate the number of orders per year:

Number of Orders=Annual consumptionEOQ
Number of Orders=18,0001000
Number of Orders=18
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