Question

0.1. (a) Pioneer Stores is trying to determine the economic order quantity for a certain type of machine tool. The firm sells 60,000 numbers of this machine tool annually at al price of Rs.80/- per piece. The purchase price per machine tool to the firm is, however, Rs.65/" The cost of carrying a machine tool is Rs. 10/- per year and the cost of placing an order is Rs.80/-. What is the total cost associated with placing one, two, five, and ten orders per year? What is the economic order quantity? (b) "The management of inventory must meet two opposing needs." Comment on the above statement and explain how a trade-off may be achieved between the two needs?

Answer 1

Particulars Annual Sales (A) Purchase Price per unit (P) Selling Price per unit (S) Carrying Cost per unit (C) Ordering Cost per Order (0) Value Unit 60000 Units 65 Rs. * 80 Rs. * 10 Rs. 80 Rs.

Particulars Number of Order (N) Order Size (0) Average Inventory (I=0/2) Annual Carrying Cost (AC=C1) Annual Ordering Cost (AO=0*N) Total Annual Cost (TC=AC+AO) Unit Nos. Units Units Rs. Rs. Rs. Values 1 21 51 10 60000 30000 12000 6000 30000 15000 6000 3000 300,000 150,000*60,000 30,000 * 80* 160 * 400 * 800 300,080 * 150, 160 *60,400 30,800

EOQ = Sqrt (2 * A * O / C) = Sqrt (2 * 60000 * 80 / 10) = 980 Units.