Time

illustration 3: (Calculation of EOQ)

Calculate the Economic Order Quantityfrom the followinginformation.Also state the number
of orders to be placed in a year.
Consumption of materials per annum 10,000 kg.
Order placing cost per order
Cost per kg. of raw materials
Storage costs 8% on average inventory
Solution
2AxO
EOQ -
c
Units consumed during year
O Ordering cost per order
 c- Inventorycarrying cost per unit per annum.

EOQ 2x8
4
100

2,500 kg.
= Total consumption of materials per annum
No.of orders to be placed in a year EOQ
10,000 kg
• = 4 Orders per year
2,500 kg.
4: (Calculation of EOQ and Total variable cost)
Illustration
(i)ComputeE.O.Q.and the total variable cost for the following:
AnnualDemand 5,000 units
Unit price ao.oo
Ordercost e16.oo
Storage rate 2% per annum
Interest rate 12% per annum
Obsolescence rate 6% per annum
(ii)Determinethe total variable cost that would result for the items if an incorrect price of
12.80is used.
Solution:
(i) Carrying COSt= Storage rate 2%
Interest Rate 12%

ObsolescenceRate - 6%

Total 20% per annum

C = 20% of < 20 = 4 per unit per annum.

Eo.Q 2AO 2x5000x16

40,000 = 200 units
C 4
Totalvariable
cost:

Orderingcost 5000 400

25 orders @ < 16
200
 Carying cost of average
200 4 400
Inventory 100 units @
2
800
Total variable cost
If an incorrect price of < 12.80 is used:
C = 20% of 12.80 = 256 per unit per annum.

E.O.Q. = = 250 units

2.56

Total variable cost:

5000 320
Ordering cost 20 orders@< 16
250

Cawing cost (of average inventory)

250
125 320
2
Total variable cost 640

Illustration 5: (Evaluation of existing policy and EOQ)

Anil& Companybuys its annual requirement of 36,000 units in 6 installments. Each unit costs
e 1 and the orderingcost is e 25. The inventory carrying cost is estimated at 20% of unit
value. Find the total annual cost of the existing inventory policy. How much money can be
saved by Economic Order Quantity.
Solution:
(a) Total Annual Cost in Existing InventoryPolicy

Ordering cost (6 orders @ 25) 150

Carrying cost of average inventory (36,000 + 6) = 6,000 units per order
Average inventory = 3,000 units
Carrying cost = of e I x 3,000 = 3,000 x 0.20 600
Total cost A 750

(b) Total Annual Cost in E.O.Q

 2 x 36,000 25 = 3000 units
EOQ (100%

+3,000 units = 12 orders

No. of orders = 36,000
=
Orderingcost (12 x 25) 300
=
Carryingcost of average inventory (3,000 x 0.20) + 2 300
Total Cost 600
Savings due to EOQ (750 - 600) 150

Note: As the units purchase cost of 1 does not change in both the computation,the same
hasnotbeen considered to arrive at total cost of inventory for the purpose of savings.
Illustration6: (Evaluation of discount offer and EOQ)
A Company manufactures a special product which requires a component 'Alpha'. The
followingparticularsare collected for the year 2011:
i) Annual demand of Alpha 8,000 units
ii) Cost of placing an order 200 per order
iii) Cost per unit of Alpha uoo
iv) Carrying cost p.a. 20%
Thecompanyhas been offered a quantity discount of 4 % on the purchase of 'Alpha'provided
theordersize is 4,000 components at a time.
Required :
i) Computethe economic order quantity
ii) Advise whetherthe quantity discount offer can be accepted.
Solution:
i) Calculation of Economic Order Quantity

2AO 2 x 8,000 units x < 200

EOQ= = 200 units
c 400 x 20/100
ii) Evaluationof Profitability
of Different Options of Order Quantity
(a) When EOQ is ordered

(0
Purchase Cost (8,000 units x 400)
Ordering Cost [(8,000 units/200units) x 000] 8,000
Carrying Cost (200 units x x l/2 x 20/100) 8,000
Total Cost 32, 16,000
 (b) When Quantity Discount is accoptod

Purchase Cost (8,000 units x (384) 30,

Ordering Cost [(8,000 units/4000units) (200]
Carrying Cost (4000 units (384 x 20/100)
Total Cost 32/26,000

Advise The total cost of inventory is lower if E()Q is adopted, Hence, the
is advised not to accept the quantity discount.
Illustration 7: (Calculation of EOQ)
The complete Gardener is deciding on the economic order quantity for two brands of
fertilizer. Super Grow and Nature's Own. The following informationis co//ected:

Fertilizer
Super Grow Nature's Own
Annual demand 2,000 bags 1,280 bags
Relevant ordering cost per purchase order (1,200 {1,400
Annual relevant carrying cost per bag (480 (560
Required:
(i) Compute EOQ for Super Grow and Nature's own.
(ii) For the EOQ, what is the sum of the total annual relevant ordering costs and total annual
relevant carrying costs for Super Grow and Nature's own?
(iii) For the EOQ, compute the number of deliveries per year for Super Grow and Nature'
own.
Solution:
2AO
EOO =
c
Where,
A = Annual Demand
O = Ordering cost per order

C = Inventory carrying cost per unit per annum

 of EOQ
(i) Calculation
Super Grow Nature's own
2,000 x 1,200
EOQ= EOQ=
480 560

= 10,000 orlOObags 6,400 or or 80 bags

.(ii) Total annual relevant cost = Total annual relevant ordering costs + Total annual relevant
carrying cost
Super Grow Nature's own
+ (1/2 x 80 bags x
1
(2,000/100 x + ( /2 x 100 bags = (1,280/80 x
x <480) 560)
= 22,400 + 22,400= 44,800
= 24,000 + 24,000 = 48,000

(iii) Numberof deliveries for Super Grow Fertilizer per year

Annual demand for fertilizer bags
EOQ
Super Grow Nature's own
2,000 bags 1 ,280 bags
= 20 orders = 16 orders.
100 bags 80 bags

Illustration8: (Calculation of Stock Levels)

Twocomponents,A and B are used as follows :
Normalusage 50 per week each
Maximumusage 75 per week each
Minimumusage 25 per week each
Re-order quantity A: 300; B : 500
Re-order period A: 4 to 6 weeks
B: 2 to 4 weeks
Calculatefor each component (a) Re-ordering level, (b) Minimum level, (c) Maximumlevel, (d)
Average stock level.
Solution :
(a) Re-ordering
level:
 delivery period.
Maximumusage per week x Maximum
= 75 unitsx 6 weeks = 450
Re-ordering level for component A units
= 75 unitsx 4 weeks = 300
Re-ordering level for component B units

(b) Minimum level:

Re-orderlevel - (Normalusage x Average period)
Minimumlevel for componentA = 450 units - 50 units x 5 weeks = 200 units
Minimumlevel for componentB = 300 units - 50 units x 3 weeks = 150 units
(c) Maximum level:
Re-order level + Re-order quantity - (Min. usage x Minimum period)
Maximumlevel for componentA = (450 units + 300 units) - (25 units x 4 weeks) = 650units
Maximumlevel for componentB = (300 units + 500 units) - (25 units x 2 weeks) = 750units
(d) Average stock level:
% (Minimum+ Maximum)stock level
Average stock level for componentA = % (200 units + 650 units) = 425 units.
Average stock level for componentB = % (150 units + 750 units) = 450 units.
Illustration 9: (Calculation of Stock Levels)
A Company uses three raw materialsA, B and C for a particular product for whichthe
following data apply:
Raw Usage price Delivery period Re- Minimum
Material per unit order per (in weeks) order
quantity Kg. (Kgs.)
Product (Kgs.) (Kgs)

Minimum Average Maximum

10 10,000 o. 10 1 2 3 2
8,000
4 5,000 0.30 3 4 5 4, 750 2
6 10,000 0.15 2 3 4 2, 000

Weekly production varies from 175 to 225 units, averaging 200 units of the said product What
would be the following quantities:
(i) Minimum stock of A,
(ii) Maximum stock of B,
(iii) Re-order level of C,
(iv) Average stock level of A.
Solution
 price fluctuations. methodas it uses FIFO or LIFO. Its advan-
tages and disadvantages thereforewill depend
upon the use of the other method viz., FIFO or
LIFO.

Illustration18: (Treatment of shortage in stock taking)

'AT'Ltd furnishes the followingstore transactions for September, 2011 :
1-9-11 Opening balance 25 units value e 162.50
4-9-11 Issues Req. No. 85 8 units

6-9-11 Receipts from B & co. GRN No. 26 50 units @ e 5.75 per unit

7-9-11 Issues Req. No. 97 12 units

10-9-11 Return to B & Co. 10 units

12-9-11 Issues Req. No. 108 15 units
13-9-11 Issues Req. No. 110 20 units
15-9-11 Receipts from M & co. GRN. No. 33 25 units @ "6.10 per unit
17-9-11 Issues Req. No. 121 10 units
19-9-11 Received replacement from B & Co.
GRN No. 38 10 units
20-9-11 Returned from department, material of
M & co. MRR No. 4 5 units
22-9-11 Transfer from Job 182 to Job 187 in the
dept. MTR 6 5 units
26-9-11 Issues Req. No. 146 10 units
29-9-11 Transfer from Dept. "A" to Dept. "B" MTR 10 5 units
30-9-11 Shonage in stock taking 2 units
Writeup the priced stores ledger on FIFO method and discuss how would you treat the
shortage in stock taking.
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