Ch.

12: Inventory Management

Practice problems on EOQ

Problem 1 A company makes bicycles. It produces 450 bicycles a month. It buys the tires for bicycles
from a supplier at a cost of $20 per tire. The company’s inventory carrying cost is estimated to be
15% of cost and the ordering is $50 per order.

a. Calculate the EOQ

In this problem:

D = annual demand = (2 tires per bicycle) x (450 bicycles per month) x (12 months in a year)= 10,800
tires

S = ordering cost = $50 per order

H = carrying cost = (15%) x ($20 per unit) = $ 3.00 per unit per year

EOQ = Square root of { (2 x 10,800 x $50) / $3 = Square root of 400,000 = 600 tires

The company should order about 600 tires each time it places an order.

b. What is the number of orders per year?

Number of orders per year = D / Q = 10,800 / 600 = 18 orders per year

c. Compute the average annual ordering cost. Average annual ordering cost = (18 orders per year) x
($50 per order) = $900 per year. Compute the average inventory. Average inventory = Q / 2 = 600 / 2
= 300 tires. What is the average annual carrying cost?

Average annual carrying cost = (average inventory) x (H)= (300 tires) x ( $3) = $900 per year.
Compute the total cost.

Total cost = (Average annual ordering cost) + (average annual carrying)= ($900) + ($900) = $1,800