# of Orders OC I CC P PC TC

590 8.4745763 406.77966 295 590 9 45000 45996.78 41000

591 8.4602369 406.09137 295.5 591 9 45000 45997.09 600
592 8.4459459 405.40541 296 592 9 45000 45997.41
593 8.4317032 404.72175 296.5 593 9 45000 45997.72
594 8.4175084 404.0404 297 594 9 45000 45998.04
595 8.4033613 403.36134 297.5 595 9 45000 45998.36
596 8.3892617 402.68456 298 596 9 45000 45998.68
597 8.3752094 402.01005 298.5 597 9 45000 45999.01
598 8.361204 401.33779 299 598 9 45000 45999.34
599 8.3472454 400.66778 299.5 599 9 45000 45999.67
600 8.3333333 400 300 600 8 40000 41000
601 8.3194676 399.33444 300.5 601 8 40000 41000.33
602 8.3056478 398.6711 301 602 8 40000 41000.67
603 8.291874 398.00995 301.5 603 8 40000 41001.01
604 8.2781457 397.35099 302 604 8 40000 41001.35
605 8.2644628 396.69421 302.5 605 8 40000 41001.69
606 8.2508251 396.0396 303 606 8 40000 41002.04
607 8.2372323 395.38715 303.5 607 8 40000 41002.39
608 8.2236842 394.73684 304 608 8 40000 41002.74
609 8.2101806 394.08867 304.5 609 8 40000 41003.09
610 8.1967213 393.44262 305 610 8 40000 41003.44

The Lecture is recorded at

http://www.csun.edu/~aa2035/CourseBase/Inventory/Inventory.ToShare/Ch12b.html
 Ordering and Carrying Costs

The Total-Cost Curve is U-Shaped

Q D
TC  H  S
Annual Cost

2 Q

Ordering Costs

QO (optimal order quantity) Order Quantity

(Q)
 Total Cost

Cost

Adding Purchasing cost TC with PD

doesn’t change EOQ

TC without PD

PD

0 EOQ Quantity
D= 9600 H= 16 S= 75
Q Ordering Carring
100 7200 800
200 3600 1600 12000
300 2400 2400
400 1800 3200
500 1440 4000 10000
600 1200 4800
700 1029 5600
800 900 6400 8000
900 800 7200
1000 720 8000 Ordering
1100 655 8800 6000
Carring
1200 600 9600

4000

2000

0
0 500 1000 1500
D= 9600 H= 16 S= 75
Q Ordering Carring Total
100 7200 800 8000
200 3600 1600 5200 12000
300 2400 2400 4800
400 1800 3200 5000
500 1440 4000 5440 10000
600 1200 4800 6000
700 1029 5600 6629
800 900 6400 7300 8000
900 800 7200 8000
1000 720 8000 8720 Ordering
1100 655 8800 9455 6000 Carring
1200 600 9600 10200
Total

4000

2000

0
0 500 1000 1500
D= 9600 H= 16 S= 75 P= 1
Q Total Purchasing
100 8000 9600 12000
200 5200 9600
300 4800 9600
400 5000 9600 10000
500 5440 9600
600 6000 9600
700 6629 9600 8000
800 7300 9600
900 8000 9600
1000 8720 9600 Total
6000
1100 9455 9600 Purchasing
1200 10200 9600
4000

2000

0
0 500 1000 1500
D= 9600 H= 16 S= 75 P= 1
Q Total PurchasingGrandTotal
100 8000 9600 17600 25000
200 5200 9600 14800
300 4800 9600 14400
400 5000 9600 14600
500 5440 9600 15040 20000
600 6000 9600 15600
700 6629 9600 16229
800 7300 9600 16900
15000
900 8000 9600 17600 Total
1000 8720 9600 18320 Purchasing
1100 9455 9600 19055
GrandTotal
1200 10200 9600 19800 10000

5000

0
0 500 1000 1500
 Quantity Discount

By quantity discount, we mean the price per unit

decreases as order quantity increases.
When quantity discounts are offered, there is a
separate, U-shaped, total cost curve for each unit
price.
When unit price decreases, the total cost curve
drops.
A different total cost curve is applied to each price.
If we have quantity discount, then we should weigh
the benefit of price discount against the increase in
inventory cost.
 Example

Demand for a product is 816 units / year ==> D = 816

Ordering cost is $12 / order ==> S = 12
Carrying cost is $4 / unit / year ==> H = 4
Price schedule is as follows
Quantity (Q) Price (P)
1-49 20
50-79 18
80-99 17
100 or more 16
What is the best quantity that we could order to minimize
our total annual cost?
Total Cost Including Purchasing Cost

p1
Cost

p2

p3
p4

0 EOQ Quantity
 Total Cost with different Purchase Price

Smaller unit prices will raise total cost curve less

than larger unit prices.

For each price, there is a separate U-shaped total

cost curve for total cost.

Note that no single curve is applied to the entire

range of quantities.

Each curve is applied to a portion of the range.

 Quantity Discount

Large quantity purchases

Price Discount - purchasing cost

Fewer orders - Ordering costs

More inventory - inventory cost

Our objective is to minimize the total annual costs

TC = SD/Q + HQ/2 + PD
In our initial model we assumed price is fixed.
Therefore we did not include PD in the model.
 Total Cost With Price Discount

p1
Cost

p2
p3
p4

0 EOQ Quantity
Total Cost Including Purchasing Cost

p1
Cost

p2
p3
p4

0 EOQ Quantity
 Total Cost Including Purchasing Cost

The applicable or feasible total cost is initially on the

curve with the highest unit price and then drops down
curve by curve at the price breaks.

Price breaks are the minimum quantities needed to

obtain the discounts.

If carrying cost is stated in terms of cost / unit of

product / year, there is a single EOQ which is the
same for all cost curves.
 Solution Procedure

1- Compute EOQ without price considerations. This EOQ is

the same for all prices.
2- But this EOQ is feasible for only one price. Identify the
corresponding price and quantity.
3-If EOQ is feasible for the lowest price ==>it is the solution. If
it is not, then calculate:
a) TC for EOQ and corresponding feasible price.
Note that TC is…
TC = HQ/2 + SD/Q +PD
b) calculate TC for all Qs of price break after the
above prices.
Compare their TC to find the best Q ==>it is the solution.
Total Cost Including Purchasing Cost

p1
Cost

p2

p4
p3

0 EOQ Quantity
Q
 Total Cost Including Purchasing Cost

p1
Cost

p2 p3 p4

0 EOQ Quantity
Q
 Total Cost Including Purchasing Cost

p1
Cost

p4
p3

p2

0 EOQ Quantity
 Example

Demand for a product is 816 units / year ==> D = 816

Ordering cost is $12 / order ==> S = 12
Carrying cost is $4 / unit / year ==> H = 4
Price schedule is as follows
Quantity (Q) Price (P)
1-49 20
50-79 18
80-99 17
100 or more 16

What is the best quantity that we could order to minimize

our total annual cost?
 Example

2 SD
EOQ 
H (Q) (P)
1-49 20
2(12)(816)
EOQ  50-79
80-99
18
17
4 100 or more 16

EOQ  70
Q=70 is in the 50-79 range. Therefore, the corresponding
price is $18.
Obviously, we do not consider P=20, but what about
P=17 or P=16?
Total Cost Including Purchasing Cost

p1
Cost

p2
p3
p4

0 EOQ Quantity
 Example

Is Q = 70 and P = 18 better or
Q = 80 and P = 17 or
Q = 100 and P = 16

TC = HQ/2 + SD/Q + PD

TC ( Q = 70 , P = 18) = 4(70)/2 +12(816)/70 + 18(816)

TC = 14968

TC ( Q = 80 , P = 17) = 4(80)/2 +12(816)/80 + 17(816)

TC = 14154

TC ( Q = 100 , P = 16) = 4(100)/2 +12(816)/100 + 16(816)

TC = 13354
 Example

Demand for a product is 25 tones / day and there are 200

working days / year. ==> D = 25(200) = 5000.
Ordering cost is $48 / order ==> S = 48
Carrying cost is $2 / unit / year ==> H = 2
Price schedule is as follows:
Quantity (Q) Price (P)
600-... 8
400-599 9
0-399 10
What is the best quantity that we could order to minimize
our total annual cost?
 Example

2 SD
EOQ 
H
Q P
2(48)(5000)
EOQ  600-...
400-599
8
9
2 0-399 10
EOQ  490
Q=490 is in the 400-599 range. Therefore, the corresponding
price is $9.
Obviously, we do not consider P=10 but what about P=8?
 Example

Is Q = 490 and P = 9 better or

Q = 600 and P = 8
We should compare their TC

TC = HQ/2 + SD/Q + PD

TC ( Q = 490 , P = 9) = 2(490)/2 + 48(5000)/490 + 9(5000)

TC = 490 + 489.8 + 45000 = 45979.8

TC ( Q = 600 , P = 8) = 2(600)/2 + 48(5000)/600 + 8(5000)

TC = 41000
 Assignment Ch12(b)
A small manufacturing firm uses approximately 3400 pounds of
chemical dye per year. Currently the firm purchases 300 pounds
per order and pays $3 per pound.
The ordering cost is $100 and inventory carrying cost is 51 cents
per pound per year.
D= 3400, S= 100, H=0.51
a) The supplier has just announced that orders of 1000 pounds
and more will be filled at a price of $2 per pound. Determine the
order size that will minimizes the total cost.
b) If the supplier offered a discount at 1500 pounds instead of
1000 pounds, what order size will minimize total cost?
 Ordering and Carrying Costs

The Total-Cost Curve is U-Shaped

Q D
TC  H  S
Annual Cost

2 Q

Ordering Costs

QO (optimal order quantity) Order Quantity

(Q)
Ordering, Carrying, and Purchasing Costs

Cost

Adding Purchasing cost TC with PD

doesn’t change EOQ

TC without PD

PD

0 EOQ Quantity
 Price Discount

Cost

p1

p2

0 Quantity
Total Cost Including Purchasing Cost

Cost

p1

p2

0 EOQ Quantity
 Price Breaks: EOQ Preferred

Cost

0 EOQ Quantity
Price Breaks: Discount Point Preferred

Cost

0 Q Quantity
 Price Breaks: EOQ Preferred

Cost

0 EOQ Quantity
 The Problem: Part A

A small manufacturing firm uses approximately 3400 pounds of

chemical dye per year. Currently the firm purchases 300 pounds
per order and pays $3 per pound.
The ordering cost is $100 and inventory carrying cost is 51 cents
per unit per year.
D=3400, S= 100, H=.51
a) The supplier has just announced that orders of 1000 pounds
and more will be filled at a price of $2 per pound.

2 SD 2(100)(3400)
EOQ    1155
H .51 Q P
0-999 3
DONE
≥1000 2
 The Problem: Part B

A small manufacturing firm uses approximately 3400 pounds of

chemical dye per year. Currently the firm purchases 300 pounds
per order and pays $3 per pound.
The ordering cost is $100 and inventory carrying cost is 51 cents
per unit per year.
D=3400, S= 100, H=.51
b) Determine the order size that will minimizes the total cost.
If the supplier offered a discount at 1500 pounds instead of 1000
pounds, what order size will minimize total cost?

EOQ  1155
Q P
0-... 3
≥1500 2
 The Problem: Part B

b) If the supplier offered a discount at 1500 pounds instead of

1000 pounds, what order size will minimize total cost?

Q P
D= 3400, S=100, H= .51 0-... 3
≥1500 2
EOQ  1155

C = HQ/2 + SD/Q + PD

C ( Q = 1155 , P = 3) = 0.51(1155)/2 + 100(3400)/1155 + 3(3400

C = 294.5 + 294.5 + 10200 = 10789

C ( Q = 1500 , P = 2) = 0.51(1500)/2 + 100(3400)/1500 + 2(340

C = 382.5+226.7 +6800 = 7409.2