Question

Sensitivity of EOQ to changes in relevant ordering and carrying costs. Alyia Company’s annual demand for Model X253 is 10,000 units. Alyia is unsure about the relevant carrying cost per unit per year and the relevant ordering cost per purchase order. This table presents six possible combinations of carrying and ordering costs.

1. Determine EQU for Alyia for each of the relevant ordering and carrying-cost alternatives.

2. How does your answer to requirement 1 give insight into the impact on EOQ of changes in relevant ordering and carrying costs?

Answer 1

Sensitivity of EOQ to changes in relevant ordering and carrying costs. 

1.         

A straightforward approach to the requirement is to construct the following table for EOQ at relevant carrying and ordering costs. Annual demand is 10,000 units. The formula for the EOQ model is:

where  D = demand in units for a specified period of time

P = relevant ordering costs per purchase order

C = relevant carrying costs of one unit in stock for the time period used for D (one year in this problem.

 

2.         

For a given demand level, as relevant carrying costs increase, EOQ becomes smaller. For a given demand level, as relevant order costs increase, EOQ increases.

For a given demand level, as relevant carrying costs increase, EOQ becomes smaller. For a given demand level, as relevant order costs increase, EOQ increases.