E.W.

TAFT
Maribbay | Masigan |
Millora | Nocasa | Opana
 CONTE
NT
QUANTITY
EPQ DISCOUNT
CONTE
NT
I. FACTS
II. ASSUMPTIONS
III. INVENTORY CYCLE
IV. PARAMETERS
V. FORMULA
V. SAMPLE PROBLEM
VI. SOLUTION
CONTE - Made by E.W Taft (1918)

NT
I. FACTS - The quantity that the
II. ASSUMPTIONS company retailer should
III. INVENTORY CYCLE order to minimize total
cost by balancing
IV. PARAMETERS
inventory holding cost
V. FORMULA and fixed ordering cost.
V. SAMPLE PROBLEM
- EPQ VS EOQ
VI. SOLUTION
CONTE EPQ VS EOQ

NT
I.
II.
FACTS
ASSUMPTION
III. INVENTORY
S
CYCLE
IV.
PARAMETERS
V. FORMULA
V. SAMPLE If a company meets its
demand by making its own
PROBLEM
VI. SOLUTION products, then the EPQ
model is more realistic.
CONTE 1. Only 1 product is involved

NT
I. FACTS
2. Annual demand is known
3. The usage rate is constant
II. 4. Usage occurs continually,
III. INVENTORY
ASSUMPTIO but production occurs
CYCLE
IV. periodically
NS 5. The production rate is
PARAMETERS
V. FORMULA
constant when production is
V. SAMPLE occurring
PROBLEM
VI. SOLUTION 6. Lead time is known and
constant
7. There are no quantity
discounts
CONTE INVENTORY

NT
I.
II.
FACTS

ASSUMPTIONS
III. INVENTORY CYCLE

CYCLE
IV.
PARAMETERS
V. FORMULA
V. SAMPLE
EXHAUSTED PRODUCTIO
PROBLEM
VI. SOLUTION N
CONTE
NT
I.
II.
FACTS

ASSUMPTIONS
III. INVENTORY
CYCLE
IV.
PARAMETERS
V. FORMULA EPQ WITH INCREMENTAL INVENTORY
BUILD UP
V. SAMPLE 2 ACTIVITIES DURING PRODUCTION RUN:
PROBLEM
VI. SOLUTION
1. DEMAND REDUCES INVENTORY
2. PRODUCTION ADDS TO INVENTORY
CONTE D DEMAN p PRODUCTION
RATE
D
NT
I.
II.
FACTS
S SETUP
COST
u USAGE
RATE
ASSUMPTIONS
III. INVENTORY QpECONOMIC
QUANTITY
Ima MAXIMUM
x INVENTORY
CYCLE
IV.
RUN

Ct CYCLE Iav
AVERAGE
INVENTORY
PARAMETERS
V. FORMULA TIME e
V. SAMPLE H HOLDING
COST
TC TOTAL
COST
PROBLEM
VI. SOLUTION
 ECONOMIC
CONTE  
RUN
QUANTITY
 
CYCLE TIME

Ct
  =

NT
I.
II.
FACTS
RUN TIME Imax
ASSUMPTIONS
III. INVENTORY Run
  time = Imax
  =
CYCLE
IV.
PARAMETERS
V. FORMULA Iaverage TCmin
V. SAMPLE Iave
  =
  Carrying Cost + Setup Cost
=
PROBLEM
VI. SOLUTION () H + (D/Q)S
CONTE A toy manufacturer uses 48,000 rubber
wheels per year for its popular dump
truck series. The firm makes its own
NT
I.
II.
FACTS wheels, which it can produce at a rate of
800 per day. The toy trucks are
assembled uniformly over the entire
ASSUMPTIONS
III. INVENTORY year. Carrying cost is $1.00 per wheel
CYCLE anually. Set up cost for a production run
IV. of wheels is $45.00. The company
PARAMETERS
V. FORMULA operates
OPTIMAL CYCLE TIME FOR
RUN 240 days/ year.
SIZE THE OPTIMAL RUN
V. SAMPLE MINIMUM TOTAL
SIZE

PROBLEM
VI. SOLUTION ANNUAL COST FOR RUN
TIME
CARRYING AND
SETUP
CONTE D = 48,000 wheels per year
day
p = 800 wheels/

NT
S = $45 u = 48,000 wheels per 240
I. FACTS H = $1 per wheel / year
per day  
days or 200 wheels
 
II. OPTIMAL RUN
SIZE
ASSUMPTIONS
III. INVENTORY
CYCLE
IV.    

PARAMETERS
V. FORMULA
V. SAMPLE 2400
Qp =wheels
PROBLEM
VI. SOLUTION
CONTE
D = 48,000 wheels per year p = 800 wheels/
day
S = $45 u = 48,000 wheels per 240
H = $1 per wheel / year days or 200 wheels

NT
I.
II.
FACTS per day
MINIMUM TOTAL ANNUAL COST FOR CARRYING
AND SETUP  
() H + (D/Q)S
ASSUMPTIONS
III. INVENTORY 1.  COMPUTE FOR Imax
Imax = Imax = =
CYCLE
IV.
 
1,800
wheels
PARAMETERS
V. FORMULA
2.
  COMPUTE FOR TCmin
V. SAMPLE TCmin = () H + (D/Q)S  
TCmin = () 1 + ()45
PROBLEM
VI. SOLUTION
TCmin =
1,80
0
CONTE
D = 48,000 wheels per year p = 800 wheels/
day
S = $45 u = 48,000 wheels per 240
H = $1 per wheel / year days or 200 wheels

NT
I.
II.
FACTS perCYCLE
day TIME FOR THE OPTIMAL RUN
SIZE

Ct
  =
Ct
  =
ASSUMPTIONS
III. INVENTORY CT = 12
DAYS
CYCLE
IV. RUN
PARAMETERS
V. FORMULA TIME
Run
  time = Run time =
V. SAMPLE   RT = 3
DAYS
PROBLEM
VI. SOLUTION
 DECREASE IN UNITS COST
WITH REGARDS TO THE
BULK PURCHASE

STRATEGY

UNIT
COST
TO INCREASE
SALES
 TO TAKE
ADVANTAGE
OR NOT?

STORAGE DETERIORATION SUFFICIENCY

SPACE = ISSUE? OF FUNDS
AVAILABILITY
To acquire Acquiring large are the funds
larger quantities may sufficient to
quantities = result to unsold carry the cost
higher goods
discount.
 DECISION: TO TAKE
SELECT ORDER QUANTITY THAT
ADVANTAGE
WILL MINIMIZE THE TOTAL
COST

TC = Carrying Cost + Ordering Cost +

Purchasing Cost
TC= (Q/2)H + (D/Q)S
+ PD
WHERE: Q =order quantity S= Ordering
cost
             H = holding cost per unit P= unit
price or cost
EXAMPLE PARA MAINTINDIHAN
NATIN SIS
D=1000 units P=$5
S= $10 per order Q= 200 units
H= $0.50 per unit per year

TC= (Q/2)H +
(D/Q)S + PD
TC= (200/2) 0.50   + (1000/200)10 +
 5(1000)
TC=  $50 + $50 + $5000
TC= $5100
-it does not involve the purchasing cost or
the unit price

1. under the assumption of no quantity

discounts, price per unit is the same for
all order sizes.
2. inclusion of unit price in the total cost
computation in that case would merely
 - Under the assumption that
quantity discounts are offered,
there is a separate U-shaped
total cost curve for each unit
price.

- Inclusion of unit prices merely

raises each curve by constant
amount

- Difference in unit price causes

each curve to raise into
different amounts.

- Small unit price < Large unit

Actual total cost curve is denoted by solid lines, only those price-
price
quantity combinations are feasible.
 Order Quantity Price per box

1 to 44 $2.00

45 to 69 1.70

70 or more 1.40

Actual total cost curve is denoted by

solid lines, only those price-quantity
combinations are feasible.
 Order Unit H H 20%
Quantit price constan of unit
y t @ $4 price
1 to 99 $10 4 .
20(10)=
2.00
100 to 9 4 .20(9)=
299 1.80
300 or 8 4 .20(8)=
more 1.60

-Analysis of quantity discount problem differs slightly,

depending on whether holding cost are independent of unit
price (i.e constant) or whether they are a percentage of unit
price.
 The procedure of determining the
overall EOQ differs slightly, depending
on which of these 2 cases is relevant.

carrying costs are

carrying costs that
expressed as a
are constant
percentage of price
carrying costs that
are constant

For carrying costs that are constant, the procedure

is as follows:
Compute the common minimum point and then identify the
price range in which the minimum point is feasible.

a.) if the minimum point is feasible in the lowest cost price

range, that is the optimal order quantity

b.) if the minimum point is in a higher cost range, compute

the total cost for the feasible minimum point and for the
price break quantity (i.e. small quantity to buy for that unit
price)  for all lower unit cost. Compare the total costs; the
quantity (minimum point or price break quantity) that
yields the lowest total cost is the optimal order quantity.
carrying costs that
are constant
carrying costs that
are constant
carrying costs that
are constant
 carrying costs are
expressed as a
percentage of price

When carrying costs are expressed as a percentage

of price, determine the best quantity with the
following procedure:

1. Beginning with the lowest unit price, compute the

minimum points for each price range until you find a
feasible minimum point. (i.e. until a minimum point falls in
the quantity range for its price)

2. If the minimum point for the lowest unit price is feasible,

it is the optimal order quantity. If the minimum point is not
feasible in the lowest price range, compare the total cost at
 carrying costs are
expressed as a
percentage of price
 carrying costs are
expressed as a
percentage of price
 carrying costs are
expressed as a
percentage of price
 carrying costs are
expressed as a
percentage of price
 carrying costs are
expressed as a
percentage of price
 carrying costs are
expressed as a
percentage of price
 carrying costs are
expressed as a
percentage of price
 E.W.
TAFT
Maribbay | Masigan |
Millora | Nocasa | Opana