Question

The annual sales of product Y of Govender Limited is 400 000 units. The purchase price is R12 per unit. The carrying cost of product Y amounts to 30% of the unit purchase price. The ordering cost is R45 per order.

Required:

Use the information provided above by Govender Limited to calculate the:

2.1 Economic order quantity (EOQ).

2.2 Number of orders that need to be placed each year.

Jumbo Enterprises plans to borrow R1 000 000 for one year. The stated interest rate is 15% per annum.

Answer 1

2.1]

EOQ =  (2SD / PH) , where

S = ordering cost

D = annual quantity demanded

P = production cost / purchase price per unit

H = holding / carrying cost % per year

In this question,

S = 45

D = 400,000

P = 12

H = 30%

EOQ =  (2 * 45 * 400,000) / (12 * 30%)

EOQ =  10,00,000

EOQ = 3,163

2.1]

Number of orders to be placed each year = annual quantity demanded / EOQ  

Number of orders to be placed each year = 400,000 / 3,163 = 126 orders