1.

An auto parts supplier sells Hardy-brand batteries to car dealers and auto
mechanics. The annual demand is approximately 1,200 batteries. The supplier pays $28
for each battery and estimates that the annual holding cost is 30 percent of the battery’s
value. It costs approximately $20 to place an order (managerial and clerical costs). The
supplier currently orders 100 batteries per month.
a. Determine the ordering, holding, and total inventory costs for the current order
quantity.
b. Determine the economic order quantity (EOQ).
c. How many orders will be placed per year using the EOQ?
d. Determine the ordering, holding, and total inventory costs for the EOQ. How has
ordering cost changed? Holding cost? Total inventory cost?

Solution:
D = 1,200 batteries
Cc = ₱8.40 per battery per year [0.30 (28)]
Co = ₱20

Optimal Order Quantity (EOQ)

2𝐶𝑜𝐷
𝑄=√
𝐶𝑐

2(20)(1200)
𝑄=√
(8.40)

48,000
𝑄=√
8.40

𝑸 = 𝟕𝟓. 𝟔𝟎 𝒐𝒓 𝟕𝟔 𝒃𝒂𝒕𝒕𝒆𝒓𝒊𝒆𝒔

Total Annual Inventory Cost

𝑄 𝐷
= 𝐶𝑐 + 𝐶𝑜
2 𝑄
 76 1200
= 8.40 + 20
2 76

300
= 8.40 (38) + 20 ( )
19

= ₱ 𝟔𝟑𝟒. 𝟗𝟗

Optimal Orders per Year

𝐷
=
𝑄

1200
=
76

= 𝟏𝟓. 𝟖 𝒐𝒓𝒅𝒆𝒓𝒔 𝒑𝒆𝒓 𝒚𝒆𝒂𝒓

Optimal reorder schedule

𝑃𝑙𝑎𝑛𝑛𝑖𝑛𝑔 𝑝𝑒𝑟𝑖𝑜𝑑
𝑡 =
𝑂𝑝𝑡𝑖𝑚𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑟𝑑𝑒𝑟𝑠
365
𝑡 =
15.8
𝒕 = 𝟐𝟑. 𝟏 𝒅𝒂𝒚𝒔

2. We need 1,000 electric drills per year. The ordering cost for these is $30 per order and
the carrying cost is assumed to be 40% of the per unit cost. And the Accounting
Department estimates the carrying cost is $40 per unit. Determine the EOQ, total annual
inventory cost policy, optimal number of orders per year and the time between each order.

Solution:
D = 1,000 electric bills
Cc = $16 per unit cost [0.40 (40)]
Co = $30
Optimal Order Quantity (EOQ)

2𝐶𝑜𝐷
𝑄=√
𝐶𝑐

2(30)(1000)
𝑄=√
(16)

60,000
𝑄=√
16

𝑸 = 𝟔𝟏. 𝟐𝟑 𝒐𝒓 𝟔𝟏 𝒆𝒍𝒆𝒄𝒕𝒓𝒊𝒄 𝒃𝒊𝒍𝒍𝒔

Total Annual Inventory Cost

𝑄 𝐷
T. I. C = 𝐶𝑐 + 𝐶𝑜
2 𝑄

61 1000
T. I. C = 32 + 30
2 61

T. I. C = 976 + 1875

T. I. C = $ 𝟐𝟖𝟓𝟏

Optimal Orders per Year

𝐷
=
𝑄
1000
=
61
= 𝟔𝟐. 𝟓 𝒐𝒓𝒅𝒆𝒓𝒔 𝒑𝒆𝒓 𝒚𝒆𝒂𝒓

Optimal reorder schedule

𝑃𝑙𝑎𝑛𝑛𝑖𝑛𝑔 𝑝𝑒𝑟𝑖𝑜𝑑
𝑡 =
𝑂𝑝𝑡𝑖𝑚𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑟𝑑𝑒𝑟𝑠
 365
𝑡 =
62.5
𝒕 = 𝟓. 𝟖𝟒 𝒐𝒓 𝟔 𝒅𝒂𝒚𝒔

3. A trading company expects to sell 15,000 mixers during the coming year. The cost
per mixer is $200. The cost of storing a mixer for 1 year is $5 and the ordering cost is
$540 per order. Find the Economic Order Quantity. The storing cost continuing to be $5
per mixer per year.
Solution:
D = 15,000 mixers
Cc = $5 per unit cost
Co = $540

Optimal Order Quantity (EOQ)

2𝐶𝑜𝐷
𝑄=√
𝐶𝑐

2(540)(15,000)
𝑄=√
(5)

16,200,000
𝑄=√
5

𝑄 = √3,240,000

𝑸 = 𝟏𝟖𝟎𝟎 𝒎𝒊𝒙𝒆𝒓𝒔

Total Annual Inventory Cost

𝑄 𝐷
T. I. C = 𝐶𝑐 + 𝐶𝑜
2 𝑄

1800 15,000
T. I. C = 5 + 540
2 1,800
 25
T. I. C = 5 (900) + 540
3

T. I. C = 4500 + 4500

T. I. C = $ 𝟗, 𝟎𝟎𝟎

Optimal Orders per Year

𝐷
=
𝑄
15,000
=
1800
= 𝟖. 𝟑𝟑 𝒐𝒓𝒅𝒆𝒓𝒔 𝒑𝒆𝒓 𝒚𝒆𝒂𝒓

Optimal reorder schedule

𝑃𝑙𝑎𝑛𝑛𝑖𝑛𝑔 𝑝𝑒𝑟𝑖𝑜𝑑
𝑡 =
𝑂𝑝𝑡𝑖𝑚𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑟𝑑𝑒𝑟𝑠
365
𝑡 =
8.33
𝒕 = 𝟒𝟑. 𝟖 𝒐𝒓 𝟒𝟒 𝒅𝒂𝒚𝒔

4. A manufacturer requires 1,000 units of a raw material, per month with a replenish rate
of 500 raw materials per day. The ordering cost is $2000 per order. The carrying cost is
estimated to be 10% of average inventory per unit per year. The purchase price of the
raw material is $50 per unit. Find the Economic Lot Size and the total cost.
Solution:
D = 1,000 units per month therefore, 12,000 units per year of raw materials
Cc = $5 per unit cost [0.10 (50)]
Co = $2000
Demand (𝑑)
𝑎𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑚𝑎𝑛𝑑
𝑑=
365 𝑑𝑎𝑦𝑠
 12,000
𝑑=
365 𝑑𝑎𝑦𝑠

𝑑 = 32.88

Optimal Order Quantity (EOQ)

2𝐶𝑜𝐷
𝑄=√
𝑑
𝐶𝑐 (1 − )
𝑟

2(2000)(12,000)
𝑄=√
32.88
5 (1 − )
500

48,000,000
𝑄=√
4.6712

𝑄 = √10,275,732.15

𝑸 = 𝟑, 𝟐𝟎𝟓. 𝟓𝟖 𝒓𝒂𝒘 𝒎𝒂𝒕𝒆𝒓𝒊𝒂𝒍𝒔

Therefore, the manufacturer should order 3,206 raw materials every time inventory
for the raw materials reaches zero (0).

Total Annual Inventory Cost

𝑑
T. I. C =, √2𝐶𝑐𝐶𝑜𝐷 √1 −
𝑟

32.88
T. I. C =, √2(5)(2000)(12000) √1 −
500

T. I. C = √240,000,000 − √0.93424
 T. I. C = $ 𝟏𝟒, 𝟗𝟕𝟑. 𝟗𝟎

Therefore, if the manufacturer orders 3,206 of raw materials approximately 5

times a year, inventory cost related to this particulars is minimized at about
$14,973.90 per year.

5. LDR Manufacturing's requirement for raw materials is 25,000 kg. per annum. The
replenish rate is uniform to 1,000 raw materials per day. Each of them cost $100. The
Production Department estimates the cost of setup at $2,300 and according to Accounting
Department the carrying cost is estimated at 20% of the value of the inventory. Determine
the amount of the ordering cost and the minimum total inventory cost.
Solution:
D = 25,000 kg per annum
Cc = $20 per unit cost [0.20 (100)]
Co = $2,300
Demand (𝑑)
𝑎𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑚𝑎𝑛𝑑
𝑑=
365 𝑑𝑎𝑦𝑠

25,000
𝑑=
365 𝑑𝑎𝑦𝑠

𝑑 = 68.49

Optimal Order Quantity (EOQ)

2𝐶𝑜𝐷
𝑄=√
𝑑
𝐶𝑐 (1 − 𝑟 )

2(2,300)(25,000)
𝑄=√
68.49
20 (1 − 1000 )
 115,000,000
𝑄=√
18.6302

𝑄 = √6,172,773.239

𝑸 = 𝟐, 𝟒𝟖𝟒. 𝟓𝟏 𝒓𝒂𝒘 𝒎𝒂𝒕𝒆𝒓𝒊𝒂𝒍𝒔

Therefore, the manufacturer should order 3,206 raw materials every time inventory
for the raw materials reaches zero (0).

Total Annual Inventory Cost

𝑑
T. I. C =, √2𝐶𝑐𝐶𝑜𝐷 √1 −
𝑟

68.49
T. I. C =, √2(20)(2300)(25000) √1 −
1000

T. I. C = √2,300,000,000 − √0.93151

T. I. C = $ 𝟒𝟔, 𝟐𝟖𝟔. 𝟖𝟔

Therefore, if the manufacturer orders 2,485 of raw materials approximately 5

times a year, inventory cost related to this particulars is minimized at about $
46,286.86 per year.