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2 × 𝐴𝑅 × 𝑂𝐶
• 𝐸𝑂𝑄 = 𝐶𝐶
180,000
8-20. E.O.Q. CALCULATE THE ECONOMIC ORDER QUANTITY AND NUMBER OF ORDERS NEEDED 𝐸𝑂𝑄 =
0.50
PER YEAR FOR ACQUISITION OF BLUE BAG CLOTH B.P.12345.
𝐸𝑂𝑄 = 360,000
AVAILABLE DATA:
𝐸𝑂𝑄 = 600 𝑚𝑒𝑡𝑒𝑟𝑠
ANNUAL REQUIREMENT OF BLUE BAG CLOTH B.P.12345 …………………… 7,200 METERS
• NUMBER OF ORDERS PER YEAR:
ORDERING COST ……………………………………………………… RS. 12.50 PER ORDER
864,000
𝐸𝑂𝑄 =
8-21.E.O.Q. THE RIZWAN EQUIPMENT COMPANY ESTIMATES ITS 0.60
CARRYING COST AT 15% AND ITS ORDERING COST RS. 9.00 PER
ORDER. THE ESTIMATED ANNUAL REQUIREMENT IS 48,000 UNITS AT A
𝐸𝑂𝑄 = 1,440,000
PRICE OF RS. 4.00 PER UNIT. 𝐸𝑂𝑄 = 1,200 UNITS
REQUIRED: • (2) NUMBER OF ORDERS PER YEAR:
(1) WHAT IS THE MOST ECONOMICAL NUMBER OF UNITS TO ORDER? 𝐴𝑛𝑛𝑢𝑎𝑙 𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑚𝑒𝑛𝑡
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑟𝑑𝑒𝑟 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟 =
𝐸𝑂𝑄
(2) NUMBER OF ORDERS TO BE PLACED IN A YEAR.
(3) ABOUT HOW OFTEN WILL AN ORDER NEED TO BE PLACED? 48,000 𝑢𝑛𝑖𝑡𝑠
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑟𝑑𝑒𝑟 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟 =
1,200 𝑢𝑛𝑖𝑡𝑠
(4) PROOF OF CORRECTNESS OF YOUR ANSWER FOR (1) IN THE FORM
OF A TABLE.
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑟𝑑𝑒𝑟 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟 = 40 𝑜𝑟𝑑𝑒𝑟𝑠
• (3) NUMBER OF DAYS AFTER WHICH AN ORDER SHOULD BE PLACED:
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑖𝑛 𝑜𝑛𝑒 𝑦𝑒𝑎𝑟 365
= = 9 𝑑𝑎𝑦𝑠
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑟𝑑𝑒𝑟𝑠 40
CONTINUE • (4) PROOF:
• NOTES:
1) ORDER SIZE = ASSUMED
2) NUMBER OF ORDERS = ANNUAL REQUIREMENT ÷ ORDER SIZE
3) ORDERING COST = NUMBER OF ORDERS × RS. 9 PER ORDER
4) AVERAGE INVENTORY = ORDER SIZE / 2
5) CARRYING COST = RS. 4 × 15% = RS. 0.6 × UNITS IN AVERAGE INVENTORY
6) TOTAL COST = ORDERING COST + CARRYING COST
• SOLUTION 8-22.
• (1) ECONOMIC ORDER QUANTITY:
QUANTITY 𝐸𝑂𝑄 =
2 × 56,250 𝑢𝑛𝑖𝑡𝑠 ×𝑅𝑠.100
𝑅𝑠. 15 + (𝑅𝑠. 50 × 10%)
11,250,000
𝐸𝑂𝑄 = 20
2 × 𝐴𝑅 × 𝑂𝐶
𝐸𝑂𝑄 =
𝐶𝐶
COST IS 20%.
𝐸𝑂𝑄 = 360,000
REQUIRED: HOW MUCH CAN THE COMPANY CAN SAVE
𝐸𝑂𝑄 = 600 UNITS
PER YEAR BY BUYING IN THE MOST ECONOMICAL LOTS?
CONTINUE • CALCULATION OF SAVING:
Annual Order Size No. of Ordering Average Carrying Total Cost
Requiremen Orders Cost Inventory Cost
t
19,200 9,600 units 2 150 4,800 units 38,400 38,550
units
19,200 600 units 32 2400 300 units 2,400 4,800
units
Saving Per Year 33,750
• NOTES:
1) NUMBER OF ORDERS = ANNUAL REQUIREMENT ÷ ORDER SIZE
2) ORDERING COST = NUMBER OF ORDERS × RS. 75 PER ORDER
3) AVERAGE INVENTORY = ORDER SIZE / 2
4) CARRYING COST = RS. 40 × 20% = RS. 8 × UNITS IN AVERAGE INVENTORY
5) TOTAL COST = ORDERING COST + CARRYING COST
ECONOMIC ORDER • SOLUTION 8-24.
QUANTITY • (1) ECONOMIC ORDER QUANTITY:
2 × 𝐴𝑅 × 𝑂𝐶
𝐸𝑂𝑄 =
𝐶𝐶
REQUIRED:
CONTINUE Annual
Requiremen
Order Size No. of
Orders
Ordering
Cost
Average
Inventory
Carrying
Cost
Total Cost
t
50,000 12,500 unit 4 1600 6,250 units 40,000 41,600
units
50,000 2,500 units 20 8000 1,250 units 8,000 16,000
units
Saving Per Year 25,600
• NOTES:
1) NUMBER OF ORDERS = ANNUAL REQUIREMENT ÷ ORDER SIZE
2) ORDERING COST = NUMBER OF ORDERS × RS. 400 PER ORDER
3) AVERAGE INVENTORY = ORDER SIZE / 2
4) CARRYING COST = RS. 1.90 + (RS. 40 × 20%) = RS. 6.4 × UNITS IN
AVERAGE INVENTORY
5) TOTAL COST = ORDERING COST + CARRYING COST
INVENTORIES LEVELS
8-25. INVENTORY LEVELS. WITA INDUSTRY HAS DEVELOPED MINIMUM LEVEL = ORDER LEVEL − AVERAGE CONSUMPTION DURING LEAD TIME
FOLLOWING DATA TO ASSIST IN CONTROLLING ONE OF ITS
MINIMUM LEVEL = 840 KG – (100 KG × 7 DAYS)
INVENTORY ITEMS:
MINIMUM LEVEL = 840 – 700
ECONOMIC ORDER QUANTITY ……………...……… 1,000 KG
MINIMUM LEVEL = 140 KG
AVERAGE DAILY USE ……………………………...…… 100 KG
• (3) MAXIMUM LEVEL:
MINIMUM DAILY USE ………………………….………... 80 KG
MAXIMUM LEVEL = ORDER LEVEL – MINIMUM CONSUMPTION DURING LEAD TIME + EOQ
MAXIMUM DAILY USE ……………………..……...…… 120 KG
MAXIMUM LEVEL = 840 KG – (80 KG × 7 DAYS) + 1,000 KG
LEAD TIME ……………………………...…………..…... 7 DAYS
MAXIMUM LEVEL = 840 – 560 + 1,000
REQUIRED: (1) ORDER POINT
MAXIMUM LEVEL = 280 + 1,000
(2) MINIMUM INVENTORY LEVEL
MAXIMUM LEVEL = 1,280 KG
(3) MAXIMUM INVENTORY LEVEL
• SOLUTION 8-27
AVERAGE DAILY REQUIREMENT ……...……………………... 20 UNITS MAXIMUM LEVEL = ORDER LEVEL – MINIMUM CONSUMPTION DURING LEAD TIME + EOQ
TIME REQUIRED FOR THE RECEIPT ………..……….…. 40 TO 50 DAYS MAXIMUM LEVEL = 1,500 UNITS – (10 UNITS × 40 DAYS) + 1,000 UNITS
ECONOMIC ORDER QUANTITY ………….…………….... 1,000 UNITS MAXIMUM LEVEL = 1,500 – 400 + 1,000
TIME TO GET EMERGENCY SUPPLY …………………………... 5 DAYS DANGER LEVEL = AVERAGE CONSUMPTION DURING LEAD TIME TO GET URGENT SUPPLIES
8-28. INVENTORY LEVELS. INDUS INDUSTRIES HAS PREPARED ORDER LEVEL = 26,000 UNITS
FOLLOWING CONSUMPTION FORECAST OF MATERIAL ‘M’ FOR THE
SECOND HALF YEAR: • (B) MINIMUM LEVEL:
MONTH CONSUMPTION MINIMUM LEVEL = ORDER LEVEL – AVERAGE CONSUMPTION DURING LEAD TIME
JULY …………………………………………………….... 22,200 UNITS
145,200 𝑢𝑛𝑖𝑡𝑠
MINIMUM LEVEL = 26,000 UNITS – × 1 𝑚𝑜𝑛𝑡ℎ
6 𝑚𝑜𝑛𝑡ℎ𝑠
AUGUST …………………………………………………. 24,000 UNITS
DECEMBER …………………………………………...…... 25,000 UNITS MAXIMUM LEVEL = ORDER LEVEL – MINIMUM CONSUMPTION DURING LEAD TIME + EOQ
ITS NORMALLY TAKES 30 DAYS TO RECEIVE THE CONSIGNMENT OF MAXIMUM LEVEL = 26,000 UNITS – (22,200 UNITS × 1 MONTH) + 32,000 UNITS
MATERIAL ‘M’ AFTER THE ISSUE OF A PURCHASE REQUISITION.
(A) THE ORDER POINT FOR THE SECOND HALF OF THE YEAR. MAXIMUM LEVEL = 3,800 + 32,000
(B) THE MINIMUM INVENTORY FOR THE SECOND HALF OF THE YEAR. MAXIMUM LEVEL = 35,800 UNITS
(C) THE MAXIMUM INVENTORY FOR THE SECOND HALF OF THE YEAR
ASSUMING THE STANDARD ORDER QUANTITY AS 32,000 UNITS.
• SOLUTION 8-29.
YOU ARE ASKED TO FIX MINIMUM AND MAXIMUM LIMITS AND 50 𝑝𝑖𝑒𝑐𝑒𝑠
MAXIMUM LEVEL = 50 PIECES – × 2 𝑤𝑒𝑒𝑘𝑠 + 60
4 𝑤𝑒𝑒𝑘𝑠
ALSO THE ORDERING LEVEL. ASSUME THE ECONOMIC ORDER
QUANTITY TO BE 5 DOZEN. IF 2 DAYS ARE SUFFICIENT TO RECEIVE MAXIMUM LEVEL = 50 – 25 + 60
EMERGENCY SUPPLY, FIX ALSO THE DANGER LEVEL.
MAXIMUM LEVEL = 85 PIECES
DANGER LEVEL = AVERAGE CONSUMPTION DURING LEAD TIME TO GET URGENT SUPPLIES
• ORDER LEVEL:
8-30. INVENTORY LEVELS. FROM THE BOOKS AND RECORDS OF • MINIMUM LEVEL:
IQBAL ART PRESS IT IS FOUND THAT AVERAGE DAILY REQUIREMENT MINIMUM LEVEL = ORDER LEVEL – AVERAGE CONSUMPTION DURING LEAD TIME DAYS
OF 20 × 30 – 90 GM. ART PAPER IS 50 REAMS. MAXIMUM
MINIMUM LEVEL = 1,250 REAMS – (50 REAMS × 15 DAYS)
MONTHLY REQUIREMENT OF THE ART PAPER DOES NOT EXCEED
2,500 REAMS AND MINIMUM REQUIREMENT DURING ANY MONTH MINIMUM LEVEL = 1,250 – 750
IS NOT LIKELY TO FALL BELOW 1,000 REAMS. TIME REQUIRED TO
MINIMUM LEVEL = 500 REAMS
SECURE DELIVERY FROM SUPPLIER IS USUALLY 15 DAYS.
ECONOMIC ORDER QUANTITY IS 1,200 REAMS. • MAXIMUM LEVEL:
REQUIRED: DETERMINE MINIMUM AND MAXIMUM LIMITS AND MAXIMUM LEVEL = ORDER LEVEL – MINIMUM CONSUMPTION DURING LEAD TIME + EOQ
ALSO ORDER LEVEL. IF THREE DAYS ARE SUFFICIENT TO RECEIVE MAXIMUM LEVEL = 1,250 REAMS –
1,000 𝑟𝑒𝑎𝑚𝑠
× 15 𝑑𝑎𝑦𝑠 + 1,200 REAMS
30 𝑑𝑎𝑦𝑠
EMERGENCY SUPPLY, DETERMINE DANGER LEVEL ALSO.
MAXIMUM LEVEL = 1,250 – 500 + 1,200
• DANGER LEVEL:
DANGER LEVEL = AVERAGE CONSUMPTION DURING LEAD TIME TO GET URGENT SUPPLIES
• ORDER LEVEL:
INVENTORY LEVELS ORDER LEVEL = AVERAGE CONSUMPTION DURING LEAD TIME + SAFETY STOCK
MAXIMUM REQUIREMENT PER DAY …………………. 100 PIECES MINIMUM LEVEL = 140 PIECES
AVERAGE REQUIREMENT PER DAY ……………………. 70 PIECES MAXIMUM LEVEL = ORDER LEVEL – MINIMUM CONSUMPTION DURING LEAD TIME + EOQ
ECONOMIC ORDER QUANTITY .………………….... 1,000 PIECES MAXIMUM LEVEL = 840 PIECES – (40 PIECES × 10 DAYS) +1,000 PIECES
THE COMPANY MAINTAINS A SAFETY STOCK OF 140 PIECES. MAXIMUM LEVEL = 840 – 400 + 1,000
YOU ARE REQUIRED TO DETERMINE THE FOLLOWING: MAXIMUM LEVEL = 1,440 PIECES
1) ORDERING LEVEL
• DANGER LEVEL:
2) MINIMUM LEVEL
DANGER LEVEL = AVERAGE CONSUMPTION DURING LEAD TIME TO GET URGENT SUPPLIES
3) MAXIMUM LEVEL
4) DANGER LEVEL IF TIME REQUIRED FOR EMERGENCY DANGER LEVEL = 70 PIECES × 1 DAY
SUPPLIES IS ONE DAY. DANGER LEVEL = 70 PIECES