Subject Name: Operations Research

Topic: Numericals of Economic Order Quantity

(EOQ Model)
Courses: MBA & M.Com II Sem.

Dr. Anuj Goel

Associate Professor
School of Business Studies
Shobhit Deemed University, Meerut
Question 1: Find out economic order quantity from the following information:

Annual Consumption = 120 units

Buying cost per order = Rs. 20

Unit Price = Rs. 100

Storage and Carrying cost as a percentage of average inventory= 12%

Solution: Given R= 120 Units, P= Rs. 100, CP= 20, CH= Rs. 12

Where, R= Annual Requirement in units

P= Price per unit

CP= Cost of placing an order

CH= Holding Cost or Carrying Cost

2∗R∗C P
EOQ= √
CH

2∗120∗20
EOQ= √
12

= 20 UNITS

Question 2: Estimate the annual requirement of material (r) from the following information:

1. Number of working days in a year 300, daily consumption of material 25 kg.

2. Orders of materials were placed quarterly and each was of 500 units.
3. Monthly consumption of material Rs. 5000 and rate of material Rs. 5 per kg.

Solution: 1. Total Consumptions= 300 days* 25 kg.

= 7500 kg.

2. Order of material placed= 500 units* 4= 2000 units

3. Annual requirement= 5000*12/ 5

= 12000 kg.
Question 3: A manufacturer requirement for a raw material is 2000 units per year. This ordering
cost is Rs. 10 per order while carrying cost is 16 paisa per year per unit of average inventory.
The purchase price of raw material is Rs. 1 per unit. Find the economic order quantity and the
total inventory cost.

Solution: Given R= 2000 Units, P= Rs 1, CP= 10, CH= Rs 0.16

Where, R= Annual Requirement in units

P= Price per unit

CP= Cost of placing an order

CH= Holding Cost or Carrying Cost

2∗R∗C P
EOQ= √
CH

2∗2000∗10
EOQ(qo)= √
.16

EOQ ( qo )= 500 UNITS

Calculation of total inventory cost:

1. Material Cost = Annual Requirement in units (R)* Price per unit (P)

= 2000*1 = Rs. 2000

2. Total Ordering Cost= R/qo*CP

= 2000/500*10

= 40

3. Total Carrying Cost= qo/2* CH

= 500/2*.16
=40

Total Inventory Cost= Material Cost+ Total Ordering Cost+ Total Carrying Cost

= Rs. 2000+ Rs. 40 + Rs. 40

= Rs. 2080

Question 4: From the following information find out:

 1. Economic Order Quantity
2. Total Ordering Cost
3. Total Carrying Cost
4. Total Inventory Cost
5. Number of orders in a year

Annual Demand = 5000 Units

Unit Price = Rs. 20

Ordering Cost = Rs. 16 per order

Storage Cost = 20% per annum

Interest Rate = 12 % per annum

Obsolescence Rate = 6% per annum

Solution: Given R= 5000 Units, P= Rs 20, CP= 16, CH= 20*20/100=Rs. 4

Where, R= Annual Requirement in units

P= Price per unit

CP= Cost of placing an order

CH= Holding Cost or Carrying Cost

1. Economic Order Quantity

2∗R∗C P
EOQ= √
CH

2∗5 000∗1 6
EOQ(qo)= √
4

EOQ ( qo )= 200 UNITS

2. Total Ordering Cost= R/qo*CP

= 5000/200*16

= Rs. 400

3. Total Carrying Cost= qo/2* CH

= 200/2*4
 = Rs. 400
4. Total Inventory Cost= Material Cost+ Total Ordering Cost+ Total Carrying Cost

= (5000*20) + Rs. 400 + Rs. 400

= 100000+800

= Rs. 100800

5. Number of orders in a year = R/q0 = 5000/200= 25 orders

Assignment Questions:

1. A factory uses Rs. 30000 worth of raw material per year, which cost Rs. 1.25 per unit. Placing
each order costs Rs 25 and the carrying cost is 0.5% per month of the average inventory. Find
the Economic Order Quantity and the total inventory cost.

2. What are the various techniques of inventory management?