Illustration 9:

From the following particulars find out the Economic Order Quantity:
(i) Annual Demand 12,000 units
(ii) Ordering cost Rs.90 per order
(iii) Inventory carrying cost per annum per unit Rs.15
Solution:

EOQ = √ 2 CAO
Where,
A = Annual Usage units = 12,000 units
O = Ordering cost per order = Rs.90
C = Annual carrying cost of one unit = Rs.15

= √ 2× 12,000×
15
90
= 380 units

Illustration 10:
A manufacturer buys certain essential spares from outside supplier at Rs.40 per set.
Total annual requirement are 45,000 sets. The annual cost of investment in inventory
is 10% and cost like rent, stationery, insurance, taxes, etc. per unit per year works
out to be Rs.1. Cost of placing an order is Rs.5.
Solution:

EOQ = √ 2 CAO
Where,
A = Annual Usage units = 45,000
O = Ordering cost per order = 5
C = Annual carrying cost of one unit = 40×10% + 1 = 5

= √ 2× 45,000
5
×5
= 300 sets

Illustration 11:
From the following information, calculate Economic order quantity.
Semi-Annual Consumption 6,000 units
Purchase price of input unit Rs.25
Ordering cost per order Rs.45
Quarterly carrying cost 3%

Solution:

EOQ = √ 2 AO
C

Where,

A = Annual Usage units = 6000 ×2 = 12,000 units

O = Ordering cost per order = 45

C = Annual carrying cost of one unit = Rs. 25 * 3% ×4 = 3

= √ 2× 12,000×
3
45

= 600 units

Illustration 12:
For direct material XXX the following details are available:
Average inventory level 200
Orders per year 40
Average daily demand 48
Working days per year 250
Annual ordering costs Rs.4,000
Annual carrying costs Rs.6,000
Required:
Determine the annual demand, the cost of placing an order, the annual carrying cost of one
unit, and the economic order quantity.
Solution:

EOQ = √ 2 AO
C

Where,
A = Annual Usage units = 48 * 250 = 12,000 units
O = Ordering cost per order = 4000/40 = 100
C = Annual carrying cost of one unit = 6000/200 = 30
 EOQ = √ 2× 4830× 4000
= 283 units
Illustration 13:
G. Ltd. produces a product which has a monthly demand of 4,000 units. The product
requires a component X which is purchased at Rs.20. For every finished product, one units
of component is required. The ordering cost is Rs.120 per order and the holding cost is 10%
p.a. You are required to calculate the Economic order quantity.
Solution:

EOQ = √ 2 AO
C

Where,
A = Annual Usage units = 4,000 × 1 × 12 = 48,000
O = Ordering cost per order = 120
C = Annual carrying cost of one unit = 20*10% = 2

= √ 2× 48,000 ×120
2

= 2,400 units

FG Material
1 unit 1 unit
48,000 units ?? = 48,000 units

Illustration 14:
The Purchase Manager of an organisation has collected the following data for one of the
A class items:
Interest of the locked up capital 20%
Order processing cost (Rs.) for each order Rs.100
Inspection cost per lot Rs.50
Follow up cost for each order Rs.80
Pilferage while holding inventory 5%
Other holding cost 15%
Other procurement cost for each order Rs.170
Annual demand 1,000 units
Cost per item Rs.10
What should be the EOQ?
(T.Y.B.Com., Nov. 2017, 2018, Mar. 2018, ICWA - Final, adapted)

Solution:

EOQ = √ 2 CAO
Where,
A = Annual Usage units = 1,000 units
O = Ordering cost per order = 100+50+80+170
C = Annual carrying cost of one unit = Rs.10 × 40% = Rs.4

= √ 2× 1,000×
4
400

= 447 units

Illustration 15:
A company manufactures a product from a raw material, which is purchased at Rs.60 per kg.
The company incurs a handling cost of Rs.360 plus freight of Rs.390 per order. The
incremental carrying cost of inventory of raw material is Rs.0.50 per kg. per month. In
addition, the cost of working capital finance on the investment in inventory of raw material is
Rs.9 per kg per annum. The annual production of the product is 1,00,000 units and 2.5 units
are obtained from one kg of raw material.
Calculate the economic order quantity of raw materials. (CA Inter, Nov. 2001, adapted)
Solution:

EOQ = √ 2 CAO
Where,
A = Annual Usage units = 40,000 units
O = Ordering cost per order = 360+390
C = Annual carrying cost of one unit = (0.50 × 12) + 9 = 15

= √ 2× 40,000
15
×750

= 2,000 kgs

FG Material
2.5 units 1 units
1,00,000 units ?? = 40,000 units

Illustration 16:
The following information relating to a type of raw material is available:
Annual demand 2,000 units
Unit Price Rs.20.00
Ordering cost per order Rs.20.00
Storage cost 2% p.a.
Interest rate 8% p.a.
Calculate economic order quantity and total annual inventory cost of the raw material.

Solution:

EOQ = √ 2 CAO
Where,
A = Annual Usage units = 2,000 units
O = Ordering cost per order = Rs.20
C = Annual carrying cost of one unit = 10%×20 = Rs.2

= √ 2× 2,000×
2
20

= 200 units
Total Annual Inventory Cost
Cost 2,000 units @ Rs.20 40,000
Ordering Cost (2,000/200 = 10 orders) 200
Carrying Cost of Average Inventory (Rs.2 × 200/2) 200
Total 40,400

Q.1, Pg116

EOQ = √ 2 AO
C
Where,

A = Annual Usage units = 50 × 365 = 18,250

O = Ordering cost per order = 50

C = Annual carrying cost of one unit = 0.02 ×365 = 7.3

= √ 2× 18,250×
7.30
50
= 500 units

Q.2, Pg116

EOQ = √ 2 CAO
Where,
A = Annual Usage units = 30,000
O = Ordering cost per order = 60
C = Annual carrying cost of one unit = 50 ×20% = 10

= √ 2× 30,000×
10
60
= 600 units

Illustration 17, Pg62

a) EOQ = √ 2 AO
C

Where,
A = Annual Usage units = 1,000*2*12 = 24,000
O = Ordering cost per order = 90
C = Annual carrying cost of one unit = 25 ×6% * 2 = 3

= √ 2× 24,000
3
×90
= 1,200 units
b) Total Annual Carrying Cost & Ordering Cost
Total Ordering Cost = 20 * 90 = 1,800
No. of Order = 24,000 / 1,200 = 20
Total Carrying cost = EOQ * 1/2 * 3
= 1,200 * ½ * 3 = 1,800

FG Material
1 unit 2 kgs
12,000 units ?? = 24,000 kgs

EOQ with Discount

Illustration 21, Pg. 65

i) EOQ = √ 2 AO
C
Where,
A = Annual Usage units = 8,000*3*4 = 96,000
 O = Ordering cost per order = 1,000
C = Annual carrying cost of one unit = 20 ×15% = 3

= √ 2× 96,000 ×1,000
3 = 8,000 units

ii) Evaluation of cost under different options of ‘order quantity’

No. Particulars Working EOQ Offer
1. Total Purchases (Kg) 96,000 96,000
2. Rate per Kg 20 20
3. Purchase Cost 1*2 19,20,000 19,20,000
4. Less:- Discount @ Nil (38,400)
2%
5. Net Cost of item 19,20,000 18,81,600
6. Total Order Cost 12,000 4,000
7. Total Carrying Cost 12,000 35,280
8. Total Cost 19,44,000 19,20,880
(including items
costs)

Working Note
Particulars EOQ Offer
No. of orders 96,000/8,000 12 96,000/24,000 4
Cost per 1,000 1,000
order
Total Order 12,000 4,000
Cost

Average 8,000/2 4,000 24,000/2 12,000

Stock
Carrying Cost 20 × 15% 3 20 × 98% × 2.94
p.a. 15%

or

[Rs.20-2%] ×
15%
Total 12,000 35,280
Carrying
Cost
Conclusion:- It is suggested that KL Ltd should accept an offer because the
total cost is less. There is saving of Rs.23,120 [19,44,000 – 19,20,880]

Illustration 26, Pg.68

EOQ = √ 2 CAO
Where,
A = Annual Usage units = 6,400
O = Ordering cost per order = 100
 C = Annual carrying cost of one unit = 8

= √ 2× 6,4008 ×100 = 400 units

Determination of Economic Order Quantity

Particulars Formula 1 2 3 4 5 6 7
Annual A 6,400 6,400 6,400 6,40 6,400 6,40 6,400
Usage 0 0
Order Size Q 6,400 3,200 1,600 800 400 200 100
No. of N = A/Q 1 2 4 8 16 32 64
Orders
Order cost O 100 100 100 100 100 100 100
per order
Carrying cost C 8 8 8 8 8 8 8
per unit p.a.
Total Order TO = 100 200 400 800 1,600 3,20 6,400
Cost N×O 0
Total TC = 25,600 12,80 6,400 3,20 1,600 800 400
Carrying Q/2 × C 0 0
Cost
Total TAC = 25,700 13,00 6,800 4,00 3,200 4,00 6,800
Annual Cost TO + TC 0 0 0

Illustration 27, Pg69

Determination of Economic Order Quantity
Particular Formul 1 2 3 4 5
s a
Annual A 5,000 5,000 5,000 5,000 5,000
Usage
Order Size Q 400 500 1,000 2,000 3,000
No. of N= 12.50 10.00 5.00 2.50 1.67
Orders A/Q
Order cost O 1,200 1,200 1,200 1,200 1,200
per order
Price p.u. P 1,400 1,380 1,360 1,340 1,320
Carrying C= 280 276 272 268 264
cost per P × 20%
unit p.a.
Total TO = 15,000 12,000 6,000 3,000 2,004
Order Cost N×O
Total TC = 56,000 69,000 1,36,000 2,68,000 3,96,000
Carrying Q/2 × C
Cost
Total TP = 70,00,00 69,00,00 68,00,00 67,00,00 66,00,00
Purchase A×P 0 0 0 0 0
price
Total TAC = 70,71,00 69,81,00 69,42,00 69,71,00 69,98,00
Annual TP + 0 0 0 0 4
Cost TO +
TC

Conclusion
EOQ = 1,000 Tonnes @ Rs.69,42,000

Illustration 27, Pg69

Determination of Economic Order Quantity
Particulars Formula 1 2 3 4 5
 Annual Usage A 5,000 5,000 5,000 5,000 5,000
Order Size Q 200 250 500 1,000 2,500
No. of Orders N= 25 20 10 5 2
A/Q
Order cost per order O 8 8 8 8 8
Price p.u. P 8.00 7.90 7.80 7.60 7.50
Carrying cost per unit C= 1.60 1.58 1.56 1.52 1.50
p.a. P × 20%
Total Order Cost TO = 200 160 80 40 16
N×O
Total Carrying Cost TC = 160 198 390 760 1,875
Q/2 × C
Total Purchase price TP = 40,000 39,50 39,000 38,00 37,500
A×P 0 0
Total Annual Cost TAC = 40,360 39,85 39,470 38,80 39,391
TP + TO 8 0
+ TC

Conclusion
EOQ = 1,000 Kgs @ Rs.38,800

REVISION
Q.35, Pg118
Solution:
(i)

EOQ = √ 2 CAO
Where,
A = Annual Usage units = 2,000 kgs × 2 kgs × 12 = 48,000 kgs
O = Ordering cost per order = Rs.120
C = Annual carrying cost of one unit = Rs.20 × 10% = 2

= √ 2× 48,0002 ×120 = 2,400kgs

FG Materials
1unit 2kg
24,000 units ? = 48,000kgs

(ii) Purchase Price + Holding Cost + Ordering Cost

48,000kgs × 20 + 2,400kgs × 20 × 10% + 20 × 120
= Rs.9,67,200

No. of orders = 48,000kgs / 2,400kgs

= 20
Q.36, Pg118
Solution:

EOQ = √ 2 CAO
Where,
A = Annual Usage units = 2,000 kgs × 2 kgs × 12 = 48,000 kgs
O = Ordering cost per order = Rs.90
C = Annual carrying cost of one unit = Rs.25 × 12% × 2 = Rs.6

= √ 2× 48,000
6
× 90
= 1,200 kgs

FG Materials
1unit 2kgs
24,000 units ? = 48,000kgs

Time gap between two orders

= 12 months / 40 orders = 0.30 months

No. of orders
= 48,000 kgs / 1,200 kgs = 40 orders

Q.36, Pg109
Solution:

EOQ / 2 = 10,000 units / 2 = 5,000 units

Q.37, Pg109
No. of orders = Annual Usage / EOQ
= 2,00,000 units / 10,000 units = 20 orders

Annual order cost = 20 × 80 = Rs.1,600