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Week #. 4 Basic EOQ Model

The document discusses economic order quantity (EOQ) models and provides examples of how to calculate optimal order quantities. It explains that EOQ models can be used under assumptions of independent or dependent demand. The models aim to minimize total costs which include ordering, holding, and shortage costs. Formulas are provided to calculate economic order quantity, optimal cycle length, and optimal costs based on demand, unit costs, reorder costs, and holding costs. Several numerical examples demonstrate applying the EOQ model to determine the best order quantity and costs for different companies ordering various products.

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398 views

Week #. 4 Basic EOQ Model

The document discusses economic order quantity (EOQ) models and provides examples of how to calculate optimal order quantities. It explains that EOQ models can be used under assumptions of independent or dependent demand. The models aim to minimize total costs which include ordering, holding, and shortage costs. Formulas are provided to calculate economic order quantity, optimal cycle length, and optimal costs based on demand, unit costs, reorder costs, and holding costs. Several numerical examples demonstrate applying the EOQ model to determine the best order quantity and costs for different companies ordering various products.

Uploaded by

rehman6
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Methods of determine the demand:

Independent Demand;

Demand is independent of any other item. Only reasonable way of forecasting future demand is to project historical trends.

Dependent Demand;

The demands for different items are often related.

Basic EOQ Model under Independent Demand:


4/20/12

Assumptions: SZABIST.

MBA Fall-

11

Costs involved in EOQ Model:

Unit Cost (UC); Reorder Cost (RC):


Requesting, Receiving and Comparing Quotations; Correspondences; Telephone costs; Receiving; Use of equipments; Expediting; Quality checks; Etc.

Holding Cost (HC); Shortage Cost (SC).

4/20/12 SZABIST. MBA Fall22 Other variables used in EOQ Models:

Basic EoQ Formulas:

Economic Order Quantity = Qo=Sqr.root(2 x RC x D / HC); Optimal Cycle Length =To=Qo/D; Optimal variable cost per unit time= VCo = HC x Qo; Optimal cost per unit time = TCo = (UC x D) + VCo

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SZABIST. MBA Fall-

33

Example #.1 under Basic EOQ Model:

ABC Trading Company buys 6,000 units of an item every year with a unit cost of Rs.30/-. It costs Rs.125/- to process and order and arrange delivery, while interest and storage cost amount to Rs.6/- a year for each unit held.

What is the best Ordering Policy?


Demand = D = 6,000 units a year; Units Cost = UC = Rs.30/- a unit; Reorder Cost =RC = Rs.125/- an order; Holding Cost = HC = Rs.6/- a unit a year.

Qo = Sqrt(2 x RC x D / HC) = 500 Units. To = Qo/D = 500/6000 = 0.083 years = 1 month.


SZABIST. MBA Fall44

4/20/12

Example #2 under Basic EOQ Model:

Each unit of an item costs a company $40 with annual holding cost of 18% of unit cost for interest charges, 1% for insurance, 2% allowance for obsolescence, $2 for building overheads, $1.50 for damage and loss and $4 for misc. costs.

If the annual demand for the item is constant at 1000 units and each order costs $100 to place, calculate the:

Economic Order Quantity; Total cost of stocking the item; If the supplier will only deliver the batches of 250 units, how does it affect the costs.
SZABIST. MBA Fall55

4/20/12

Example #3 under Basic EOQ Model:

Ms. Sarah works for a manufacturer that makes parts for marine engines. The parts are made in batches, and every time a new batch is started it costs $1640 for disruption and lost production and $280 in wages for the fitters. One item has an annual demand of 1,250 units with a selling price of $300, 60% of which is direct material and production costs. If the company is looking for a return of 20% a year on capital, what is the optimal batch size of the item and the associated costs? D = 1250 Units; UC = $300 x 60% = $180 per unit;
4/20/12 HC = SZABIST. MBA $180 x 20% = $36 Fall66

Example #4 under Basic EOQ Model:

Mr. Brown works in his bakery for 6 days a week for 49 weeks a year. Flour is delivered with a charge of $7.50 for each delivery. Mr. Brown uses an average of 10 sacks of flour a day, for which he pays $12 a sack. He has an overdraft at the bank which costs 12% a year, with spillage, storage, loss and insurance costing 6.75% a year. 1) What size of delivery should Mr. Brown use and what are the resulting costs? 2) How much should he order if the flour has a shelf life of 2 weeks? 3) How much should he order if the bank imposes a 4/20/12 77 maximum orderSZABIST. of $1500? value MBA Fall-

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