Division of Engineering Management and Decision Sciences

LSCM 617-Production and Operations Management

HW #1
Sarah Hassaan
 Sarah Hassaan

EOQ Sensitivity Analysis PART 1

Q1) What reasons "in practice" might cause the firm to deviate from the optimal EOQ, i.e.,
order more or less than the EOQ optimal quantity?

Answer 1:
1) There is an assumption in EOQ that you are ordering the same quantity at each reorder
point. However, if you have seasonal demand, there will be fluctuations in demand so
firms will adjust their order quantities with the varying demand than using the EOQ.
2) The EOQ assumes that the ordering cost, transportation cost and holding cost will
remain constant over the period of time calculated. However, there maybe changes
such as discounts from the suppliers for large orders, or changes in the storage cost, or
inflation, interest rates, or changes in the cost of goods that may lead the firm to adjust
its order quantity.

Q2) Examine the effect of decreasing (and respectively, increasing) the order quantity by 10%,
20%, and 30% on the total cost

Answer 2:

Table 1: Sensitivity Analysis for Change in Quantity

Changes in Order Quantity

Percent
Q Level Value Total Annual Cost
Multiplier
30% Less 0.7 364.2915 372.2018807
20% Less 0.8 416.3332 358.4628851
10% less 0.9 468.3748 351.6627762
Original 0 520.4165 349.7198879
10% More 1.1 572.4581 351.3095238
20% More 1.2 624.4998 355.5485527
30% More 1.3 676.5414 361.8255763

Table 1 highlights that straying from the original EOQ results in increased total annual costs,
regardless of decreasing or increasing the EOQ by said percentages.

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Q3) Conduct the same analysis on demand and holding costs.

Answer 3:

Table 2: Sensitivity Analysis for Change in Demand

Changes On Demand
Demand Percent
Value Total Annual Cost
Level Multiplier
30% Less 0.7 1820 297.2619047
20% Less 0.8 2080 314.7478991
10% less 0.9 2340 332.2338935
Original 0 2600 349.7198879
10% More 1.1 2860 367.2058823
20% More 1.2 3120 384.6918767
30% More 1.3 3380 402.1778711

Table 2 highlights that the Total Annual Cost increases as the demand increases.

Table 3: Sensitivity Analysis for Change in Holding Cost

Changes in Holding Cost

Holding Cost Percent
Value Total Annual Cost
Level Multiplier
30% Less 0.7 0.4704 297.2619047
20% Less 0.8 0.5376 314.7478991
10% less 0.9 0.6048 332.2338935
Original 0 0.672 349.7198879
10% More 1.1 0.7392 367.2058823
20% More 1.2 0.8064 384.6918767
30% More 1.3 0.8736 402.1778711

Table 3 highlights that the Total Annual Cost increases as the holding cost increases. The results
are the same as table 2, which suggests that the affects are the same on the Total Annual Cost.

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Q4) Plot the changes in total cost for the three analyses and provide commentary on the
results.

Answer 4:

Sensitivity Analysis For Total Annual Cost

410

390
Total Annual Cost

370

350

330

310

290
0.7 0.8 0.9 1 1.1 1.2 1.3
Percentage Change

Order Quantity Change Demand Change Holding Cost Change

Figure 1: Plot of the total annual cost against variations on the Order Quantity, Demand and the Holding Cost

As can be seen from the graph, the variations in demand and holding result in the same change in Total
Annual Cost. Demand and holding cost represent a straight line, which suggest that they are
proportional to the percentage change. This proves that the Demand and holding costs are constants
that are affected by the EOQ.

The EOQ however is parabolic with a minimal value at 1 (the original value), above and below the value
of 1 the total Annual Cost Increases.

The point of the intersection is the Optimal Order Quantity that reflects the minimum total cost.

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EOQ with Quantity Discounts PART 2

Q1) Determine the quantity that the company should order under each of the discount models
Quantity Purchased Per-Unit Price
1 to 699 $3.2
700 to 999 $3.1
1000 or more $2.9

Answer 1:

Figure 2: Solution to the EOQ with Quantity Discounts

The solution in figure 2, the first table calculates the EOQ for each of the discount models
provided in the question. The holding cost decreases as the unit price decreases (discount) as
the quantity purchase increases. The EOQ is calculated using the standard equation and the
values are compared to the Quantity Purchased. You can see that only model 1 is within the
range, where as model 2 and 3 are less than the minimal quantity purchase amount and have to
be adjusted to the minimal quantity purchased to make them feasible.

This adjusted EOQ value is used in the second table to calculate the total annual cost. In this
equation we will also add the Inventory Cost (which is Demand * Unit Price Cost) as this will
affect the total annual accost given the discount. By calculating the Total cost for model 1, using
the calculated EOQ in the first table, and model 2 and 3, using the adjusted EOQ, we can see
that the lowest Total Annual Cost is for model 3 (highlighted in yellow). Hence the Quantity
Discount model the beverage company should select is Model 3

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The quantity that the company should order under each of the discount models can be seen in
figure 3. This is also equivalent to the adjusted EOQ in figure 2.

Figure 3: The Order Quantity (EOQ) for each discount model

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Appendix A – Solved Class Example