Economic Oder Quantity


1) R & B Beverage offers a drink product with a near-constant demand of 3600 cases annually. It cost $20 to place each order, and the cost of each storing one case is $0.75 per year.
(a)Construct a graph of order cost, storage cost, and total cost (for order quantities up to 600 cases).

Graph of Cost Versus Quantity


(b)Estimate from your graph the economic order quantity (EOQ).

From the graph, EOQ is 600 cases. This is obtained where the curve of the storage cost meets the curve of the order cost.

(2) The annual demand for a product is 1500 units. Each unit costs $2.50. An order costs $20 to set up, and the annual stock holding cost is $0.50 per unit per year.

(a)Determine the economic order quantity. 

Q=(2DS/H)1/2

((2 X 1500 units X $20)/$0.50)1/2=346.4 units 

(b)What is the total cost of the optimum policy? 

TC=PD + K(D/EOQ) + h(EOQ/2)

(1500X$2.50+$20(1500/346.4)+$0.50(346.4/2) =$3,923.21

(3) The annual demand for a manufacturing component is 5000 units. The component costs $22 per unit.  Order costs are $80 per order, and the stockholding cost is $5 per component.  The manufacturing plant operates 300 days per year.  Assume that stock replenishment is instantaneous.

(a) If the company’s current inventory strategy is to order 250 components per order, determine the time between orders and the number of orders placed per year. 

Number of orders=5000 units/250) = 20 orders 

The time between orders=300 days per year/20 orders = 15 days

(b) Assume an optimal EOQ is 400 components per order.  Calculate the total cost under the current strategy and an EOQ strategy.  What would be the cost savings if the company switched to an EOQ order strategy?

TC= (5000units X $22) +$80(5000units/400) +$5(400/2) =$102,000(Current strategy)
TC= (5000units X $22) +$80(5000units/250) +$5(250/2) =$102225(EOQ strategy)

Cost saving= ($102225-$102,000) = $225 

(4) R&B Beverage offers a drink product with near constant demand of 3600 cases annually.  It costs $20 to place each order and the cost of storing one case is $0.75 per year.  

a.  Determine the EOQ for R&B Beverage using Excel Solver
D
S
H

3600
$20
$0.75










Q=
438.178

b.  If order costs increase by 10%, what is the impact on EOQ and total cost?

10% increase in order cost would lead to increase EOQ and eventually, total cost.
















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