Question

PoMA Ltd uses the Economic Order Quantity Model to determine order quantities. The following information is given for the next year:

Order costs 20 per order

Delivery costs 5 per order

Holding costs 10% of purchase price per annum

Annual demand 19,000 units

Purchase price 40 per unit

No safety stocks are held.

a. What is the EOQ?

b. What are the total annual costs of stock if the company uses EOQ to determine quantity ordered every time (i.e. the total purchase cost plus total ordering cost plus total holding cost)?

c. A supplier has offered a 1% reduction in the purchase price if a minimum of 1000 units are ordered per order. Compute the total annual cost if PoMA decided to avail this option. What saving or incremental cost would this result in for PoMA Ltd compared to ordering the EOQ?

yes included

Answer 1

EOQ Referes to the size of an order for which total of ordering and carrying cost are minimum

Given Information;

EOQ =

√2AO/C

Where, A = Annual requirement = 19,000 units

O = Cost per order = Order cost + Delivery cost = 20 + 5 = 25 per order

C = Carrying cost per unit per annum (10 % Purchase price per annum)

= 19000*40*10% / 19000 = 4 per unit

(a) EOQ =

√2*19000*25/4

= 487 ( Approx)

  

(b)      

No of orders to be placed in a year = Annual demand / EOQ

= 39 orders

Total annual cost = Purchase cost + order cost + Holding cost

= 19000*40 + 39 *25 + 19000*40*10%

Annual cost = 8,36,975

(C)

Annual cost for ordering EOQ = 8,36,975 (as solved above, beacause the no of order and quantity per order does not chaanges)

Annual cost availing discount option;\

To avail 1% discount, we should order 1000 units per order

That means No of orders = Annual demand / units per order

= 19000/1000

= 19 orders

Total cost = Purchase cost + order cost + Holding cost

= 19000*(40-0.4) + 19*25 + [19000*(40-0.4)*10%]

= 8,28,115

Savings by availing the discount offer = (836975 - 828115)

= 8860