EPQ and Q Discounts

11/8/2021
Mansoura University
Faculty of commerce
Department of Business Administration
Purchasing & Inventory Management
2021
DR.YOUMNA YOUSSEF 1
Purchasing the Right

Quantity
Dr.Youmna Youssef 2
1
11/8/2021
▪ In simple terms, the basic elements involved in

performing the purchasing function include
The obtaining the proper equipment, material,
Importance of supplies, and services in the right quality, from
the right source in the right quantity, at the
Purchasing right price, and at the right time.
Dr.Youmna Youssef 3
Inventory management
Inventory management has two main concerns.
✓ One is the level of customer service, that is, to
have the right goods, in right quantities, in the
right place, at the right time.
✓The other is the costs of ordering and carrying
inventories.
• The overall objective of inventory management is
to achieve satisfactory levels of customer service
while keeping inventory costs within reasonable
bounds
Dr.Youmna Youssef 4
2
11/8/2021
Size of order : how

much to order
Two fundamental
decisions :
Timing : when to
order
Dr.Youmna Youssef 5
Key Inventory Terms

• Lead time: time interval between ordering and
receiving the order
• Holding (carrying) costs: cost to carry an item in
inventory for a length of time, usually a year
• Ordering costs: costs of ordering and receiving
inventory
Dr.Youmna Youssef 6
3
11/8/2021
The basic economic order quantity.
Order quantity The economic production quantity

model.
models
The quantity discount model.
Dr.Youmna Youssef 7
EPQ – Used when company makes its own product
Economic
Considers a variety of costs/terms:
Production
• Carrying Cost
Quantity (EOQ • Setup Cost (analogous to ordering costs)
with • Maximum and Average Inventory Levels
• Economic Run Quantity
Incremental • Cycle Time
Replenishment) • Run Time
Dr.Youmna Youssef 8
4
11/8/2021
Economic Production Quantity (EPQ)

• Production done in batches or lots
• Capacity to produce a part exceeds the part’s
usage or demand rate
• Assumptions of EPQ are similar to EOQ except
orders are received incrementally during
production
Dr.Youmna Youssef 9
EPQ Assumptions
1. Only one item is involved
2. Annual demand is known
3. Usage rate is constant
4. Usage occurs continually, production periodically
5. Production rate is constant
6. Lead time doesn’t vary
7. No quantity discounts
Dr.Youmna Youssef 10
10
5
11/8/2021
ASSUMPTIONS OF EPQ model

are similar to those of EOQ
except that instead orders
received in single delivery ,
units are received incrementally
during production
11
Economic Production Quantity

Production
Production
& Usage
& Usage
Usage Usage
12
6
11/8/2021
13
• During the production phase of the cycle,

inventory builds up at a rate equal to the
difference between production and usage
Production rates.
order • if the daily production rate (p) = 20 units
quantity • daily usage rate (u) = 5 units
• inventory will build up at the rate (I) of
20 -5 =15/ day
14
7
11/8/2021
• Definitions
Economic • S = Setup Cost
production • H = Holding Cost
• Imax = Maximum Inventory
Quantity (EPQ)
• Iavg = Average Inventory
Or EOQ with • D = Demand/Year
Incremental • p = Production or Delivery Rate
Replenishment • u = Usage Rate
15
EOQ with Incremental Replenishment

Total Cost = Carrying Cost + (Imax/2) H + (D/Qo) S
Setup Cost
Economic run quantity Qo = 2DS/H * p/(p-u)
Cycle time (time between Qo /u
runs)
Run time (production phase) Qo /p
Maximum Inventory Level Imax = (Qo /p)(p-u)

Average Inventory Level I average = Imax /2
16
8
11/8/2021
Economic Run Size
2DS p
Q0 =
H p− u
17
PRODUCTION ORDER QUANTITY MODEL

The economic run quantity is
DR.YOUMNA YOUSSEF 18
18
9
11/8/2021
PRODUCTION ORDER QUANTITY MODEL

Total cost is
19
Notes
The maximum and average inventory levels are:
20
10
11/8/2021
Cycle time : time expected between orders or

between beginning of run .
For the economic run size model :
It is a function of the run size and usage (demand
rate)
21
Run time : production phase of the cycle.

For the economic run size model :
It is a function of the run size and production rate
22
11
11/8/2021
Example (EPQ)
A toy manufacturer uses 48,000 rubber wheels per year for its
popular dump truck series. The firm makes its own wheels,
which it can produce at a rate of 800 per day. The toy trucks
are assembled uniformly over the entire year. Carrying cost
is $1 per wheel a year. Setup cost for production run of
wheels is $45. The firm operates 240 days per year.
Determine the:
A. Optimal run size
B. Minimum total annual cost for carrying and setup
C. Cycle time for the optimal run size
D. Run time
23
Solution
24
12
11/8/2021
Thus, a run of wheels will be made every 12 days.
25
Thus, each run will require three days to

complete
26
13
11/8/2021
Summary
27
EPQ Model Inventory Levels

Inventory Level
Production portion of Maximum inventory

cycle level ( 1800)
Q× (1- u/p)
Demand portion of cycle with
no supply
Time
3 days
12 days
28
14
11/8/2021
Quantity discounts: price

reductions for large orders
There are two general

Quantity Discounts cases of the model:
• When carrying costs are
constant
• When carrying costs are
specified as a percentage of
unit price
29
• In EOQ model , determination of order size

doesn’t involve purchase cost.
• The reason is that under the assumption of no
Basic EOQ quantity discounts
model vs. • Price per unit is the same for all order sizes.
• Inclusion of unit price in the total cost
Quantity consumption in that case would simply increase
discount the total cost by the amount P times D.
• So, A graph of total annual purchase cost versus
model quantity would be a horizontal line .
• Thus, including purchasing costs would raise the
total cost curve by the same amount( PD)
30
15
11/8/2021
TOTAL COSTS WITH PURCHASING COST
Annual Annual
TC = carrying + ordering + Purchasing
cost
cost cost
Q + DS + PD
TC = H
2 Q
31
Total Costs with PD
32
16
11/8/2021
Total Costs with PD

Cost Adding Purchasing cost TC with PD
doesn’t change EOQ
TC without PD
PD
0 EOQ Quantity
33
Total Cost with Constant Carrying Costs
A. When carrying costs are constant, all curves have their minimum
points at the same quantity.
B. When carrying costs are stated as a percentage of

unit price, the minimum pointsYoussef
Dr.Youmna do not line up 34
.
34
17
11/8/2021
Total Cost with Constant Carrying Costs
TCa
Total Cost
TCb
Decreasing
TCc Price
CC a,b,c
OC
EOQ Quantity
35
• The procedures for determining the overall EOQ

when carrying costs are constant:
1. Compute the common EOQ
2. Only one of the unit prices will have the EOQ in its
feasible range since the ranges do not overlap.
A. When carrying Identify that range.
i. If the feasible EOQ is on the lowest price
costs are range, that is the optimal order quantity
constant ii. If the feasible EOQ is in any other range,
compute the total cost for the EOQ and for
the price breaks of all lower unit costs.
iii. Compare the total costs. The EOQ that yields
the lowest total cost is the optimal order
quantity .
36
18
11/8/2021
• The maintenance department of a large

hospital uses about 816 cases of liquid
cleanser annually. Ordering costs are $12,
carrying costs are $4 per case a year, and the
Example: new price schedule indicates that orders of
less than 50 cases will cost $20 per case, 50
price breaks to 79 cases will cost $18 per case, 80 to 99
cases will cost $17 per case, and more than
100 units will cost $16 per case. Determine
the optimal order quantity and the total
cost.
37
•D = 816 cases per Range price

year S= $12 H = $4
per case per year 1 - 49 $20
50 - 79 $18
80-99 $17
100 or more $16
38
Dr.Youmna Youssef
38
19
11/8/2021
39
Solution
1. Compute the common EOQ
40
20
11/8/2021
2. The total cost to purchase 816 cases a year, at the rate of 70 cases
per order will be:
41
Note: because lower cost ranges exist, each must be checked against
the minimum cost generated by 70 cases at $18 each
42
21
11/8/2021
Therefore, because 100 cases per order yields

the lowest total cost, 100 cases is the
overall optimal order quantity.
43
• When carrying costs are specified as a percentage of

unit price, determine the best purchase quantity with
the following procedures:
1. Beginning with the lowest unit price, compute
B. When carrying the EOQs for each price range until you find a
feasible EOQ (i.e., until an EOQ falls in the
costs are quantity range for its price)
specified as a 2. If the EOQ for the lowest unit price is feasible, it is
percentage % the optimal order quantity. If the EOQ is not
feasible in the lowest price range, compare the
of unit price total cost at the price break for all lower prices
with the total cost of the largest feasible EOQ
3. The quantity that yields the lowest total cost is
the optimum
44
22
11/8/2021
• Surge Electric uses 4,000 toggle switches a

year. Switches are priced as follows: 1 to
499, 90 cents each; 500 to 999, 85 cents
each; and 1,000 or more, 80 cents each. It
costs approximately $30 to prepare an order
Example :2 and receive it, and carrying costs are 40
percent of purchase price per unit on an
annual basis.
Determine the optimal order quantity and
the total annual cost.
45
46
23
11/8/2021
Solution
Range Unit Price H

1 to 499 $0.90 .40(0.90) = .36
500 to 999 $0.85 .40(0.85) = .34
1,000 or more $0.80 .4(0.80) = .32
47
• Find the EOQ for each price, starting with the lowest
price, until you locate a feasible EOQ.
Because an order size of 866 switches will

cost $.85 each rather than $.80 each, 866 is
not a feasible minimum point for $.80 per
switch. Next, try $.85 per unit.
48
24
11/8/2021
This is feasible; it falls in the $0.85 per switch range of

500 to 999.
Compute the total cost for 840, and compare it to the
total cost of the minimum quantity necessary to
obtain a price of $0.80 per switch
49
Thus, the minimum-cost order size is 1,000 switches
50
25
11/8/2021
Thanks !
51
26

EPQ and Q Discounts

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

EPQ and Q Discounts

Uploaded by

Copyright:

Available Formats

11/8/2021

Purchasing & Inventory Management

Purchasing the Right

▪ In simple terms, the basic elements involved in

Size of order : how

Key Inventory Terms

The basic economic order quantity.

Order quantity The economic production quantity

The quantity discount model.

EPQ – Used when company makes its own product

Economic Production Quantity (EPQ)

ASSUMPTIONS OF EPQ model

Economic Production Quantity

• During the production phase of the cycle,

EOQ with Incremental Replenishment

Maximum Inventory Level Imax = (Qo /p)(p-u)

Economic Run Size

PRODUCTION ORDER QUANTITY MODEL

PRODUCTION ORDER QUANTITY MODEL

The maximum and average inventory levels are:

Cycle time : time expected between orders or

Run time : production phase of the cycle.

Thus, a run of wheels will be made every 12 days.

Thus, each run will require three days to

EPQ Model Inventory Levels

Production portion of Maximum inventory

Quantity discounts: price

There are two general

• In EOQ model , determination of order size

TOTAL COSTS WITH PURCHASING COST

Total Costs with PD

Total Costs with PD

Total Cost with Constant Carrying Costs

B. When carrying costs are stated as a percentage of

Total Cost with Constant Carrying Costs

• The procedures for determining the overall EOQ

• The maintenance department of a large

•D = 816 cases per Range price

Therefore, because 100 cases per order yields

• When carrying costs are specified as a percentage of

• Surge Electric uses 4,000 toggle switches a

Range Unit Price H

Because an order size of 866 switches will

This is feasible; it falls in the $0.85 per switch range of

Thus, the minimum-cost order size is 1,000 switches

You might also like