## Problem 1

The John Equipment Company estimates its carrying cost at 15% and its ordering cost at $9 per order. The estimated annual requirement is 48,000 units at a price of $4 per unit.

**Required:**

- What is the most economical number of units to order?
- How many orders should be placed in a year?
- How often should an order be placed?

### Solution

**1. What is the most economical number of units to order?**

Annual requirement = 48,000 units

Ordering cost = $9 per order

Carrying cost = 15% of per-unit cost

Per unit cost = $4 per unit

**2. How many orders should be placed in a year?**

= Annual requirement / EOQ

= 48,000 units / 1,200 units

= 40 orders

**3. How often should an order be placed?**

Frequency of orders = No. of days in one year / No. of orders

= 360 days / 40 orders

= 9 days

## Problem 2

To date, Raymond Bro. has been purchasing an item in lots of 900 units. This equates to a three-month supply. The cost per unit is $12, the order cost is $16 per order, and the carrying cost is 25%.

**Required: **How much can Raymond Bro. save per year by purchasing the item in the most economical quantities?

### Solution

The first stage in our working is to compute the annual requirement.

Given that 900 units amounts to a three-month supply, the monthly requirement is 900 units / 3 months = 300 units.

Therefore, the annual requirement is 300 units x 12 months = 3,600 units.

In turn, the EOQ can be computed as follows:

No. of Orders = 3,600 units / 900 units

= 4 orders

= 3,600 units / 196 units

= 18 orders approx.

Ordering Cost = 4 orders x $16 per order

= $64

Also, in the case of EOQ:

= 18 orders x $16 per order

= $288

Average Inventory = 900 units / 2

= 450 units

In the case of EOQ:

= 196 units / 2

= 98 units

Carrying cost = $3 x 450 units

= $1,350

In the case of EOQ:

= $3 x 98 units

= $294

Total cost = $64 + $1,350

$1,414

In the case of EOQ:

=$288 + $294

= $582

Saving = $1,414 – $582

= $832

## Problem 3

A manufacturing company places a semi-annual order of 24,000 units at a price of $20 per unit. Its carrying cost is 15% and the order cost is $12 per order.

**Required:**

- What is the most economical order quantity?
- How many orders need to be placed?

### Solution

No. of orders per year = Annual Requirement / EOQ

= 48,000 units / 620 units

= 77 orders approximately

To compute the annual requirement:

24,000 units are ordered semiannually, therefore:

Annual requirement = 24,000 units x 2 = 48,000 units.

### Keep Learning

What a brain exercise that was! Interested to know more about this topic? We’re happy to connect you to a financial advisor in Lake Mary, FL. But if you live outside the locale, fret not. Check on our financial advisor page to learn which areas we are currently working with.