Question

​(EOQ

calculations​)

A downtown bookstore is trying to determine the optimal order quantity for a popular novel just printed in paperback. The store feels that the book will sell at four times its hardback figures. It​ would, therefore, sell approximately

4 comma 0004,000

copies in the next year at a price of​ $1.50. The store buys the book at a wholesale figure of​ $1. Costs for carrying the book are estimated at

​$0.250.25

a copy per​ year, and it costs

​$1010

to order more books.a. Determine the

EOQ.

b. What would be the total costs for ordering the books​ 1, 4,​ 5, 10, and 15 times a​ year?

c. What questionable assumptions are being made by the EOQ ​model?

Answer 1

a) EOQ formula= ((2*Annual demand*order cost)/Carrying cost per order p.a)) ^ (1/2)

= 565 units per order (approx)

b)

No.of orders	Copies per order (Annual demand/No. of orders)	Average inventory (copies per order/2)	Total Ordering Cost (no. of orders*10)	Total Carrying Cost(avg inventory*0.25)	Total Purchase Cost (annual demand* $1/copy)	Total Cost (Order +Carrying+Purchase Cost)
1	4000/1 =4000	2000	10	500	4000	4510
4	1000	500	40	125	4000	4165
5	800	400	50	100	4000	4150
10	400	200	100	50	4000	4150
15	266.67	133.33	150	33.33	4000	4183.33

c) Questionable assumptions made by EOQ Model:

1. The model assumes that replenishment of stock is very easy, i.e, prompt deliveries by the supplier

2. The purchase price stays the same throughout the year which might not be true incase the supplier wishes to change the same

3. The annual demand for the product stays constant all over the year, incase it changes, all EOQ calculations have to be revised which is again a tedious task