Question

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Given the following list of items:

a. Classify the items as A, B, or C

b. Determine the economic order quantity for each item (round to the nearest whole unit)

Item	Estimated Annual Demand	Ordering Cost	Holding Cost (%)	Unit Price
H4-010	20,000	55	25	4.5
H5-201	60,200	65	25	6
P6-400	9,800	85	35	30.5
P6-401	14,500	55	35	14
P7-100	6,250	55	35	11
P9-103	7,500	55	45	24
TS-300	21,000	45	30	47
TS-400	45,000	45	30	42
TS-041	800	45	30	22
V1-001	33,100	30	40	6

Answer 1

a) Item classification into A,B and C classes can be done based on the value that the items contribute to the overall value all the items.

Value of Item i = Estimated Annual Demand * Unit Price

Once the items are arranged in a descending order in terms of value, the items which are contributing to around 80% value are grouped under A class.

The items that are contributing to around 15 % (80-95 % cumulative) are grouped under B class.

The items that are contributing to around 5 %(95-100 % cumulative) are grouped under C class.

Economic Order Quantity (EOQ) = SQRT(2*D*S/H) where D = Annual Demand, S = Ordering Cost, H = Holding cost = % Holding cost * Unit Price.

Below is the calculation table with grouping based on the cumulative percentages, EOQ based on the formula -

Item	Estimated Annual Demand	Ordering Cost	Holding Cost (%)	Unit Price	Value of the product annual quantity	%Contribution	%Cumulative	Class	EOQ = SQRT(2*D*S/H)
TS-400	45,000	45	30	42	1890000	44.00	44.00	A	567
TS-300	21,000	45	30	47	987000	22.98	66.98	A	366
H5-201	60,200	65	25	6	361200	8.41	75.39	A	2284
P6-400	9,800	85	35	30.5	298900	6.96	82.35	A	395
P6-401	14,500	55	35	14	203000	4.73	87.08	B	571
V1-001	33,100	30	40	6	198600	4.62	91.70	B	910
P9-103	7,500	55	45	24	180000	4.19	95.89	B	276
H4-010	20,000	55	25	4.5	90000	2.10	97.99	C	1398
P7-100	6,250	55	35	11	68750	1.60	99.59	C	423
TS-041	800	45	30	22	17600	0.41	100.00	C	104
				Sum	4295050	100.00