Question

Calia has received the following demands for a product in 2020:

Month        1            2           3           4            5         6 7           8       9 10 11 12

Demand      300      700       800      900      3300      200      600      900      200      300      1000       800

Suppose ordering cost (OC) is $504 and holding cost (HC) of one unit of product in a year is $3. There is no shortage cost. Backordering is not allowed in this model.x

Question: Given that the total demand of the whole year is 10,000 products, suppose the company is going to use the EOQ model for the accumulated demand of one year (10,000). In other words, ignore the monthly demand. Compute:

• Optimal order quantity (Q*)
• Total cost
• Frequency of orders
• Time between orders

Answer 1

Annual demand (D) = 10000

Holding cost/unit (H) = 3

Ordering cost (S) = 504

Optimal order quantity (Q*) = sqrt(2SD/H) = sqrt(2*10000*504/3) = 1833.03 or 1833 units

Total cost = Annual holding cost + Annual ordering cost = HQ/2 + DS/Q =3*1833.03/2 + 10000*504/1833.03 = 5499.09

Number of orders place = (D/Q) = (10000/1833.03) = 5.45 or 6 orders. This means frequency of orders is every 2 months or once every 60 days

Time between orders is 2 month.