Question

Ricky Orange’s annual demand is 12 500 units. Ordering cost is RO. 100 per order. Holding cost is estimated at 20% of product cost which is RO. 50 per unit. The firm works for 50 weeks per year and each week has 5 days.
Calculate:
a)   Economic order quantity.                                
b)   Number of orders to be placed per year.                   
c)   Daily usage quantity.                          
d)   The annual cost of ordering.                           
e)   Explain any three assumptions of the economic order quantity.  

Answer 1

Here,

Annual Demand, D = 12,500 units

Order Cost, S = Rs 100

Holding Cost = 20% of product cost

Product Cost = 0.5 per unit

So holding Cost per unit, H = 20% of 0.5 = 0.1

Economic order Quantity is given by

EOQ = 2DS/H = 2*12500*100/.1 = 5000

So Economic order quantity = 5000

Number of Orders per year = 12500/ 5000 = 2.5

No of Days = 50*5 = 250 days

So daily usage = 12500/ 250 = 50

Annual cost of Ordering = 100*2.5 = 250

Here, we assumed more than 1 year of operation and hence some delivery are divided and hence we have number of orders in decimal.

Some of the Assumptions in EOQ are

1) We use yearly demand to calculate the EOQ thus considering that to be constant. But in reality annual demand might change a lot thus making EOQ not so economic.

2) Also the ordering cost is considered as constant, but that may change depending on a lot of factors

3) Also the oder quantity can have defective products and it may take time to replace them incurring some cost. But in EOQ assumption we consider that replacement is instataneous