Group D

Asim Ali
Amir Qasim
Asim Javed
Faisal Mehboob
Nasir Aziz
Syed Muhammad Hilal
Contents Of EOQ
Definition of EOQ
How to use the EOQ model in a
business organization
Total Cost Book Case
 EOQ MODEL
Economic Order Quantity

Definition
EOQ, or Economic Order Quantity,
is defined as the optimal quantity of
orders that minimizes total variable
costs required to order and hold
inventory.
How to use EOQ in your organization

How much inventory

should we order each
month?

The EOQ tool can be used

to model the amount of
inventory that we should
order each month or year.
 EOQ Model Basics
• Total Cost = Purchase Cost + Order
Cost + Holding Cost

Purchase cost: cost of the inventory

items.
Ordering cost: cost of purchasing an
receiving an order
Holding Cost :includes costs such as
storage cost
Total Cost Book Equation

TC=f(q)=D C0/Q + qPCh/2+pD

 D=Annual Demand Unit

 C0=Ordering Cost per Unit
 Ch = Carrying Cost
 P=Purchase Price Per Unit
 Q=Order Quantity
Example In Our Book

Question

1: For a given inventory items D=5000, Co

or S =125,p=100,Ch orH=0.20.detrmine
the value of q which minimizes the
total inventory costs .what are the
minimum annual inventory costs? How
many orders must be placed each
year? What are annual ordering costs?
Annual carrying costs ?
 Continued
Answer

we have found all the values of these values by

this formula:
Tc=f(q)=d/qC0+q/2PCh+PD
• Q that minimizes the inventory cost i.e. Q =
250
• Tc total minimum cost i.e. Tc = 505000
• Number of order per year i.e. D/Q= 20
• Annual ordering cost i.e. D/Q.C0 = 2500
• And annual carrying costs i.e. Q/2PCh= 2500
 Continued
Question (2)

The order quantity which minimizes the

annual inventory cost is termed as EOQ.
Determine the general expression for q that
minimizes the annual inventory costs.
Solution
We have found the solution by taking the
derivative of the formula, we got
Tc=f(q)=d/qC0+q/2PCh+PD
f’(Q) = -DC/Q2+1/2PCh
 Continued
Question (3)

Prove that the critical value for Q does results

in the relative minimum on the cost function
Solution
We can prove this by substituting the value of
critical point i.e.250 in the second derivative.
f’’(Q) = .008 which is > 0
So f’’(250)= .008 which is also >0
Hence proved.
 Continued
Question (4)

Using the expression for Q in part 2, show that

annual ordering costs equals annual carrying costs
when operating at EOQ level?
Solution
Tc=f(q)=d/qC0+q/2PCh+PD
f’(Q)=-DCo/Q2+1/2 PCh=0
DCo/Q2=1/2 PCh
Putting the values from part 1 we get
10=10
Hence proved
 Continued
Question (5)

The annual inventory cost can be expressed in terms of the

annual number of orders placed per year,N,recognizing
that N=D/Q. rewrite the generalized cost function in
terms of N instead of Q.Detrmine the general expression
for the values of N which minimizes annual inventory
cost. Confirm that the critical value for N does result in
the minimum value of the cost function.
Solution
f(N)=NCo+D/2N.PCh+PD
f’’(N)= 12.5 which is > 0
Hence proved that N results in minimum values.
 Question no 10:
Solution
• C(X) = 40,000,000 – ( 36,000,000 – 10000x ) ∕ x
= 4000,000 ∕ x + 10,000
O(x) = 500 + 0.40x
A(X) = C(x) + O(x)
A(x) = 4000,000 ∕ x + 10500 + 0.40x
Taking Derivative we get
X=3162.27 hours
Taking 2nd Derivative we get
A′′( 3162.27 ) = 8000,000 ∕ (3262.27)³ > 0
• (B) A(3162.27) = 4000,000 ∕ 3162.27 + 0.40(3162.27)
+ 10500
= 13029.822 $ (Minimum Cost Per Hour)
• (C) S(3162.27) = 36000,000 - 10,000 ( 3162.27 )
= 4377300 (Salvage Value)
 Question no 11:
Solution
(A) p = 100 – x (Price per Person)
(B) 0 ≤ x ≤ 100 (Yes there are restriction as described)
(C) R = h(x) = ( price for trip ) (number signed up )
= 5000 – 50x – x²
(D) The value result is
R = 50 – 2x = 0 X = 25 travel above 50
(E) Let Y =no of people who signup for trip
The number of people who should sign up for the trip is
50 + x or 50 + 25 = 75
(F) R = h(25) = 5,000 + 50(25) – (25)²
= $ 5625 (maximum value of R)
(G) Price per ticket in maximum revenue is
P = f (25) = 100 – 25 = 75
(H)The club will be generate fewer person as
No: 50 * 100 = 5000 (which is less then 5625)
 Question no 12:
Solution
(A) Net profit = gross profit – advertising costs
Gross profit = profit margin * R * population
= (2) ( 1 – e-0.02x ) ( 2,000,000 )
= 4,000,000 – 4, 000,000e-0.02x
Cost of campaign = 10,000$ per day
Net profit = G.P-Cost of campaign
Net profit = P = 4,000,000 – 4,000,000e-0.02x - 10000x
P′ = 80,000 e0.02x – 10,000 = 0
80,000 e-0.02x – 10,000
e 0.02x = 10,000
e 0.02x = 0.125
So X = 105
Taking 2nd Derivative we get
P’’ = - 195-93 < 0 So Relative Maxima
(B) Put Value in the function we get
P = 3531174.287
R = 87.75 %
 Question no 23:
Solution
Q=F(p)=12000-10p²
P=10$ ,p 20$ , p=30$
N=p/q.f’(p)
F’(p)=-20p
N=p/q-20p
N=-20p²/q  -2p²/1200-p²
At p=10$
=-2(10) ²/1200-(10) ² -0.1818<1 inelastic
At -p=20$
= -2(20) ²/1200-(20) ²  -1<1 inelastic
At P=$30
=-2(30) ²/1200-(30) ²  -6<1 inelastic