Question

EOQ analysis Tiger Corporation purchases 1,400,000 units per year of one compo- nent. The fixed cost per order is $55. The annual carrying cost of the item is 27% of its $10 cost. a. Determine the EOQ if (1) the conditions stated above hold, (2) the order cost is $1 rather than $55, and (3) the order cost is $55 but the carrying cost is $0.01. b. What do your answers llustrate about the EOQ model? Explain. P15-5

Answer 1

	EOQ=	Squire Root of {(2DS)H}
	where:
	EOQ=Economic Order Quantity
	D=Demand in units (typically on an annual basis)
	S=Order cost (per purchase order)
	H=Holding costs (per unit, per year)
	​
Given,	D=14,00,000 units
	S=$55 per Order
	H=$2.7 ($10*27%)
A (1)	Computation of EOQ (Unit)
	EOQ	=SQRT((2*1400000*$55) / $2.7)
		7552 Units
A (2)	Computation of EOQ (Unit)
	If S=$1 per Order
	EOQ (Units)	=SQRT((2*1400000*$1) / $2.7)
		1018 Units
A (3)	Computation of EOQ (Unit)
	If,
	S=$55 per Order
	H=$0.01
	EOQ (Units)	=SQRT((2*1400000*$55)/0.01)
		124097 Units

(b)

EOQ stands for Economic Order Quantity. It is concerned with inventory management.

It insure that the inventory should not be less or more than requirement

Because Excess Inventory leads to loss of opportunity Profit, an less inventory leads to increased operational cost

So a level is required to be try for the quantity to be ordered at which holding cost and carrying cost should be minimum as possible. Such level is called EOQ