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Determining EOQ and total costs at EOQ

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Economic ordering quantity (EOQ) is a commonly used method for optimizing the inventory costs with ordering costs. As the production manager for the organic juice line, you will need to determine the optimal order quantity. If the annual demand for organic orange juice at Ross and Pugett is 200,000 units, the annual carrying cost rate is 12% of the cost of the unit. The product costs $48/unit to purchase, and the product ordering cost is $28.00.

What is the basic EOQ?
What is the TC at the EOQ?
How much would the TC increase if the order quantity must be 1,000 units?
What other factors should be considered when ordering materials?
Show all your calculations.

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Solution Summary

Solution describes the steps for finding economic order quantity and total costs at EOQ.

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Solution

What is the basic EOQ?

D=Annual Demand = 200000 units (assume that there are 250 working days in a year)
Ch=Annual Carrying Cost = 48*0.12 per unit =$5.76 per unit
Co=Order Cost = $28 per order
Now, EOQ = (2*D*Co/Ch)^0.5 = (2*200000*28/5.76)^0.5=1395 units.

What is the TC at the EOQ?

Total Cost =Purchase ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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