Total ordering costs = total carrying costs

EOQ = 2AO Or, A ×O = EOQ × c

C EOQ 2
Or, EOQ²C = 2AO
Carrying cost is
calculated Or, EOQ = 2AO
On purchase
price C

Material cost = annual
demand(A)×purchase
price(P)
A = Annual requirement
• O = Ordering cost per Order
C=Carrying cost per unit.
• Q = Ordering quantity (size)
Annual requirement =1,125,000 unit
Order cost =Rs.500 per order
Carrying cost =25%
Purchase price =Rs.5

Required EOQ by formula, graphic and tabulation

method
2 × 1125000× 500

EOQ = 0.25 × 5

=30,000 units
Order size (Q) 10,000 20,000 30,000 40,000 50,000
Number of 1,125 56.255 37.5 28.125 22.5
orders [A/Q]
Average 5,000 10,000 15,000 20,000 25,000
inventory [Q/2}
Carrying cost 6,250 12,500 18,750 25,000 31,250
[Q×C/2]
Order 56,500 28,500 18,750 14,500 11,500
cost[A×O/Q]
Total cost [O+C] 62,750 41,000 37,500 39,500 42,750
Inventory costs in rupees

75,000 Total inventory cost

Total carrying cost

25,000

Total ordering cost

50,000

10,000 20,000 30,000 40,000 50,000

Order size
 ROL= lead time × average
consumption +safety stock –
goods in transit

Lead –time:
The time in receiving order from suppliers.
Also known as delivery or procurement
Average consumption = A÷ days in a year
or
A÷ week in a year
Goods in transit:
Goods which have been ordered but have
not yet been received
If lead- time in greater than order frequency
(inventory cycle) there will be goods in transit.
Order frequency is calculate as follows:
Order frequency = days in a year

number of order
Note: if lead-time in days in a year, if lead time
weeks then use weeks in a year and so forth.
Goods in transit = number of goods transit × EOQ
Number of good transit(GIT)= lead time
inventory cycle
TIC= TOC+ TCC+ cost of safety stock+ total purchase cost
= A ×O + EOQ × c + safety stock × C+ A × PP
EOQ 2

Total requirement(A) =240,000unit(360 days)

Ordering cost(O) =Rs.100 per unit
Purchase price(PP) =Rs.9.60 per unit
Carrying cost (C) =20% of purchase price
Safety stock(SS) =18,000 units
a. Calculate the length of inventory cycle
b. Calculate the reordering level when the delivery period or lead-
time is (I) 7 days 14 days 16 days
When delivery period = 7 days
No of orders in transit =7 =0.933 =0 orders

7.5
When delivery period = 14 days
No of orders in transit=14 =1.86 =1 orders
7.5
When delivery period= 16 days
No of orders in transit=16 =2.33 =2 orders
7.5
When delivery period is 7 days
ROL=18,000+240,000 ×7-0 = 22,667 units
360
When delivery period is 14 days
ROL=18,000+240,000 ×14-1×5000 =22,333 units
360
When delivery period is 16days
ROL=18,000+240,000 ×16-2 ×5000 = 18,667 units
360
Solution:

Here, EOQ = 2×240,000 ×100

9.60 ×20%
= 5,000unit
No of order = 240,000
5,000
=48 times
Inventory cycle= 360
48
=7.5 days
8-21
Alisha Enterprises orders 2000units per week. Assuming 52 weeks a
year,
Its annual sales is 2000× 52 = 104,000 units.
A = 104,000 C = 40 O = 1100

, EOQ = 2×104,000 ×1100 = 2391.65 unit

40
Since Alisha’ order size currently is 2000 units, it
is not optimal. The optimal inventory policy calls
for ordering 2,391.65 units each time.
 8.22

A = 800 units , C = 2 per unit per year , O = 50per order , Lead time = 5
days
Days of safety requirement =10days

EOQ= 2×800 ×50

2
= 200units
Therefore , EOQ is 200 units. The form must placed an ordered of 200
unit each time over the year the maintain total inventory cost .
B. Average inventory =EOQ/2 +safety stock
= 200 ÷ 2+22
=122units
Working note safety stock =days of safety requirement× daily uses
10 ×800/360=22.22 or 22 units
 c
ROL= ( lead time × average consumption )+safety stock –
goods in transit (GIT)
= ( 5 × 800 / 360 ) + 22 – 0=33.11 or 33units
Therefore the re- order point is 33 units. The form must
place a new order when the level of inventory falls to 33
units.
Calculation of GIT
Order frequency = days in a year/ number of order
=360/800÷200
=90 days
Since lead time is less than order frequency there is no GIT
That is GIT =0
 8.23
A= 20,000units
P=Rs. 2per unit
Days of safety requirement =20days
Safety stock=20days sales
20×20,000÷360 = 1,111.11~1,111units
C= 25%of Rs.2 = 0.50per unit per year
O=Rs.32 per order
Lead time=10days
Reordered point =?
EOQ=?

EOQ= 2×20,000 ×32 = 1600units

0.50

ROL= ( lead time × average consumption )+safety stock – goods in transit

(GIT)
= ( 10 × 20,000 / 360 ) + 1,111 – 0= 1,666.6 or 1,667units
The form must place reorder, when the level of
inventory according to previous order declines to
1,667 units
ii) Calculation of goods in transit
Order frequency= days in a year ÷ number of order
= 360 ÷ 20,000/1,600
= 28.8~29 days
Since, lead time is less than order frequency, there
is no goods in transit, i.e., goods in transit =0
8-24
A = 50,000 units
P = Rs. 5 per unit
Days of safety requirement =20days
Safety stock=10,000 units
C = 20%of Rs.5 = 1.0per unit per year
O = Rs.25 per order
Lead time = 1week
EOQ=?
÷

a.EOQ= 2×50,000 ×25 = 5000units

1.0

No of order = A / EOQ=50,0000 / 5000 =100 times

ROL= ( lead time × average consumption )+safety stock
– goods in transit (GIT)
= ( 1 × 5,00,000 / 50 ) + 10000 – 5000 = 15,000 units

The form must place a re-order, when the level of inventory falls to
15,000 units
ii) Calculation of goods in transit
Order frequency= days in a year ÷ number of order
= 50 ÷ 100 = 0.5 weeks.

Since, lead time is greater than order frequency, there is goods in

transit, i.e., goods in transit =1 × EOQ

Number of orders in transit = Lead time / Order frequency

= 1/ 0.5 = 2
 8-25
We assume 52 weeks in a year and accordingly firm places 52 orders
during the year.
Order size per week (Q ) = 170 units A = 170× 52 = 8840units
C = 45 O = 48
TCC = C× Q /2
45 × 170/ 2 = Rs. 3,825.
The firm’s total carrying cost is currently Rs 3,825.

Toc = 48 × 52 = 2,496

The firm’s total restocking cost is Rs.2,496.

Since the firm is experiencing high carrying cost it should decrease the order size
The optimal inventory policy of the firm is given by EQO model. So first we
Calculate EOQ as follows

a.EOQ= 2×8,840 ×48 = 137.33 units

45
The EOQ model shows that the firm must order in the size of 137.33 units each time
With this order size the firm should place 8,840/137.33 =64.37 orders each year
Meaning that each order should placed in the interval of 52/64.37 =0.81 weeks.
 8.26 A = 12,50,000 square yards.
P = Rs. 25 per square yard
Safety stock=12,500 square yards
C = 20%of Rs.25 = 5 per unit per year
O = Rs.2,00 per square yard(including 150 setup charge at mill)
Lead time = 1 weeks
EOQ=?

a.EOQ= 2×12,50,000 ×200 = 10,000 sq yards

5

Therefore the EOQ for this cloth is 10,000sq yards.

b. Average inventor inventory rupee=
[EOQ / 2 + safety stock ] × P

=[10,000/2+12,500] × 5

=Rs.437,500

C. TIC= A/EOQ ×O + [EOQ / 2 + safety stock ] × c

= 1,250,000/10,000 × 200 + [10,000 / 2 + 12,500] × 5
= 112,500

ROL= ( lead time × average consumption )+safety stock – goods in

transit (GIT)
= ( 1× 1250,000 / 50) + 12500 – 20,000 = 17,500 sq. yards
The form must place a re-order, when the level of inventory falls to 17500units
ii) Calculation of goods in transit
Order frequency= days in a year ÷ number of order
= 50 ÷ 12,50000/ 10,000 = 0.4 weeks.

Since, lead time is greater than order frequency, there is goods in transit, i.e.,
goods in transit = 1/ .4 = 2.5 GIT = 2 × 10000 =20000 sq yards.
 8-27
A = 2,40,000 bags.
P = Rs. 40 per bags
Safety stock=12,00 bags
C = 2%of Rs 40 = 0.80 per bag per year
O = Rs.25 per
Lead time = 2 weeks
EOQ=?

2×240,000 ×Rs.25 = 3,873 bags

a.EOQ=
0.80

Therefore the economic order quantity is 3,873 bags.

b. The maximum inventory
We have
Maximum inventory = EOQ + safety stock
= 3,873 + 1,200
= 5,073 bags
therefore, the maximum inventory of fertilizer is 5,073 bags
c. The average inventory
We have,
Average inventory=EOQ / 2 + safety stock
= 3,873 / 2 + 1,200
= 3,136.5~3,137
Therefore, Rapti fertilizer’s average inventory will be 3,137 bags.
d. The order frequency
we have,
Order frequency = days in a year / number of order
= 360 / 240,000/3,873
= 5.81~6days
Therefore, the company must order in every 6 days
 8-28

A = 20,000 filters
C = Rs.0.10 per filter per month
O = Rs.40 per order
EOQ=?

EOQ= 2×20,000 ×Rs.40 = 4,000 filters or 4 lots

0.10

Therefore the optimal order quantity is 4,000 filters or 4 lots.

b. The optimal order quantity (EOQ)
Carrying cost(C)= Rs.0.05 a filter per month
We have

EOQ= 2×20,000 ×Rs.40 = 5,656.9 filters ~ 5,657 filters

0.05

Since, the lot size is 1,000filters, the company should order 6,000
filters (i.e. 6 lots) each time. The lower the carrying cost, the more
important ordering costs become relatively and the larger the
optimal order size.
 O=Rs.10 per order
We have,

EOQ= 2×20,000 ×Rs.10 = 2,000 filters

0.10
Therefore, the optimal order quantity is 2,000 filters or 2 lots. The
lower the order cost , the more important carrying cost become
relatively and the smaller the order size.

d. There is a inverse relationship between carrying cost and optimal order

quantity . If carrying cost increases, the optimal order quantity decrease
and vice versa .There is a direct relationship between ordering cost and the
optimal order quantity . If ordering cost increases, the optimal order also
increase and vice versa.
The finical manager should also consider other factors such as quantity
discount, inflation, seasonal demand, etc, while designing in inventory
policy.
 8-29

A = 5,000 copies
SP = Rs. 12.5 per copies
Cost price (P) = 20%of Rs 12.50 = 10 per copy
O = Rs.100 per order , C = Rs. 1 per copy per year

a. 1. No. of order (N) 1 2 5 10 20

2. Oder size ( Q = A/ N ) 5000 2500 1000 500 250

3. Average inventory (Q/2) 2500 1250 500 250 125

4. Ordering cost (N × O ) 100 200 500 1000 2000

5. Carrying cost ( Q/2 × C ) 2500 1250 500 250 125

6. Total cost = 4+5 2600 1450 1000 1250 2125

b. EOQ= 2×5,000 ×Rs.100 = 1,000 books

1
C. The implicit assumptions being made about the annual sales rate are (i) the
book store exactly sells 5000 copies of this book in a year, and (ii) the sales rate is
constant throughout the year

8-30
A = 150,000×12=18,00,000 Kg
C=8
O = Rs.200 per order
Lead time=4days, days in a year =300
EOQ=?
EOQ 2×18,00,000 ×Rs.200 =9,486.8 ~ 9,478 units
8

b. TIC = A / EOQ × O + EOQ / 2 × C

= 1800000 / 9487 × 200+ 9478 / 2 × 8 = RS 75895

No. of order = A / EOQ

= 1800000/ 9487 = 189.7 or 190 times
d.ROL= ( lead time × average consumption )+safety stock – goods in transit
(GIT)
= ( 4d × 18,00,000 / 300 ) + 0 – 2× 9487 = 5,026 kegs

8-31
A = 45,000 units
P = Rs. 5 per unit
Days of safety requirement = 6days
C = Rs 0.3 per unit per year
O = Rs.30 per order
Lead time = 5 days
EOQ=?

EOQ= 2×45,000 ×Rs.30 = 3,000 units

0.30

b. TIC = A / EOQ × O + EOQ / 2 × C

= 45,000 / 3000 × 30+ 3000 / 2 × .30 = RS 900
c. Average daily sales = Annual sales / Days in a year
= 45000 / 360 = 125 units
 d. Level of safety stock = Days of safety requirement × Daily sales
= 6 × 125 = 750 units

e. ROL= ( lead time × average consumption )+safety stock – goods

in transit (GIT)
= ( 5 × 125 ) + 750 – 0= 1,375units

The form must place a re-order, when the level of inventory falls to 1375
units
ii) Calculation of goods in transit
Order frequency= days in a year ÷ number of order
= 360 ÷ 45000/3000 = 24 days

Since, lead time is less than order frequency, there is no goods in transit,
i.e., goods in transit = 0
 8-32

The stores sells 700 suits per week. Since daily sales are equal and
stores is open 7 days in a week its daily sales are 100 suits. Therefore
annual sales(R) of the suits are 100 × 365 =Rs.36,500 suits.
We have,
EOQ= 500 suits
Safety stock = 100 suits
Lead time = 3 days
Number of orders (N) to be placed per year
N=R/EOQ =36,500/500 = 73 times
The stores places 73 orders during the year
When company receives the shipments of suits, it maximum inventory
level reaches to Maximum inventory =EOQ+safety stock =500+100
=600suits
its lead time is 3 days, so the reorder level is
ROL=(Daily sales × lead time) + safety stock
= (100 × 3) +100 =400 suits
if today is Sunday and the firm has just received shipments, its inventory
level reaches to 600 suits. Then every day stores sells 100 units and it
should place the next order when the inventory level declines to 400 suits.
Note that Sunday morning it will receive the shipments. It will consume
100 units on Monday so that it will have left 400 units on Tuesday
morning. Therefore, it should place its next order Tuesday morning, that
is, 2 days after
 8-33 A = 26,000 dozen
price per dozen (P) = 7.80
O = Rs.30 per order , C = 20% of 7.80 ~ 1.56 per dozen per year

a. 1.Order size(dozen)(Q) 250 500 1000 2,000 26,000

2. No of Order ( N = A/ Q) 104 52 1000 13 1
3. Average inventory (Q/2) 125 250 26 1,000 13,000
4. Ordering cost (N × O ) 195 390 500 1,560 20,280
5. Carrying cost ( Q/2 × C ) 3,120 1560 780 390 30
6. Total cost = 4+5 3,315 1950 1560 1950 20,310

In the above table ,the total cost is minimum at order size of 1,000 dozens where
ordering cost is equal to carrying cost. Hence, the economic order quantity is
1000 dozens of floppy diskettes for the firm.
 Alternatively, the EOQ can be determined by using the formula,
We have

EOQ= 2×26,000 ×Rs.30 = 1,000 units

1.56

Therefore, the economic order quantity is 1,000 dozens of floppy diskettes

 14-11

A = 5,000 ×12 =60,000units

C = Rs 0.04 ×12=Rs.0.48 per unit per year
O = Rs.200 per order
Lead time = 5 days
EOQ=?
The algebraic expression for total cost of holding and ordering inventory

Total holding cost = Q / 2 × C

total ordering cost =R/Q ×O
Where,
Q = order size in unit
R = total requirement in unit for a planned period
O = ordering cost per order
C = carrying cost per unit per period
 Total cost
4,000

3,394

Carrying cost
Cost (in Rs.)

2,000

1,697

1,000

Ordering cost

0 3,000 6,000 9,000 12,000 Order size (in Units)

Working notes
(I)Economic order quantity(EOQ)= 2×60,000 ×Rs.200 = 7,071 units
0.48

(ii) Total holding cost = 7,071 / 2 × 0.48 =Rs.1,697

(iii) Total ordering cost = 60,000 / 7,071 × 200 =Rs.1,697

(iv) Total cost = Rs.1,697 +Rs.1,697

= Rs.3,394
c. The economic order quantity is determined at the point of intersection
between total ordering cost and total carrying cost, where total cost is
minimum. Thus, according to the above figure, the EOQ is 7,071 units.
d. The re-order point
We have,
Re- order point = ( lead time × daily usage )+safety stock – goods in
transit (GIT)
=(5× 60,000 / 360 ) + 0 – 0
=833.33~833 units
Therefore, the recorder point is 833 units. When the level of inventory falls to 833
unit, the firm has to make a new order.
Working notes
Calculation of goods in transits
Order frequency = 360 / 60,000 / 7,071
= 42.4 ~42 days
Since, lead time is less than order frequency, there is no goods in transit, i.e. goods
In transit =0
Given: 8-34
A = 585,000 units
P = Rs.2 per unit
C = 26% of price
= 20% of Rs.2
= Rs.0.52 per unit per year
O = Rs.169 per order
Safety stock = 10,000 units
Lead time = 2 weeks
(I). The economic order quantity (EOQ)
We have,
2×585,000 ×Rs.169 = 19,500 units
EOQ=
0.52
Therefore, the economic order Quantity is 19,500 units.
(b)The elasticity of EOQ with respect to sales
(A)=585,000× 2 =1,170,000 units
Percentages changes in sales = +100%
Calculation of new EOQ

New EOQ= 2×585,000 ×Rs.169 = 27,577 units

0.52

Calculation of percentages change in EOQ:

We have
Percentages change in EOQ = New EOQ – Old EOQ × 100
Old EOQ

= 27,577 – 19,500 × 100

19,500
=41%
Now, calculation of elasticity of EOQ with respect
to sales
We have,
Elasticity of EOQ with respect to sales = % change
in EOQ÷ % change in sales
= 0.41 ÷ 1
= 0.41
Therefore, the elasticity of EOQ with respect to
sales is 0.41. it indicates that there is a positive
relationship between sales and EOQ. As sales
increase the EOQ will also increase but less than
proportionately.
 (C) The elasticity of EOQ with respect to carrying cost.

(C)= Rs.0.52 – 50 % of Rs0.52

= Rs.0.26 per unit per year
Percent change in carrying cost = - 50%
Calculation of new EOQ

New EOQ = 2×585,000 ×Rs.169 = 27,577 units

0.26

Calculation of percentages change in EOQ:

We have
Percentages change in EOQ = 27,577 – 19,500 × 100
19,500
=41%
Now, calculation of elasticity of EOQ with respect to carrying
cost
We have,
Elasticity of EOQ with respect to carrying cost
= % change in EOQ ÷ % change in
carrying cost
= 0.41 ÷ -0.50
= -0.82
Therefore, the elasticity of EOQ with respect to carrying cost
is -082. this indicates that there is a negative relationship
between EOQ and carrying cost. As carrying cost decrease,
the EOQ will in increase but less than proportionately.
 8-35

A = 7,200 pieces
C = 20% of price
= 20% of Rs.50
= Rs.10 per unit per year
O = Rs.250 per unit
a. The economic order quantity (EOQ)
We have,

EOQ= 2×7,200 ×Rs.250 = 600 pieces

10

Therefore, the economic order quantity is 600 pieces

 b. The total inventory cost (TIC)
We have,×
TIC=total ordering cost + total carrying cost
= R EOQ
O  c
EOQ 2
7,200 600
 Rs.250   Rs .10
600 2

=Rs.3,000 + Rs.3,000
= Rs,6000

Therefore, the total inventory cost at EOQ is Rs.6,000

Given,
(Q)=1,800 units
Discount=1%of Rs.50 =Rs.0.50 per unit
Price after deducting discount =Rs.50 – Rs.0.50
= Rs.49.50 per unit
(C)= 20% of Rs49.50
= Rs.9.90 per unit per year
Calculation of total inventory cost of discount offer
We have,
R Q
Total cost =  O   C  discount
Q 2
7,200 1,800
 Rs.250   Rs .9.90  7,200  Rs .0.50
1,800 2
 Rs.1,000  Rs.8,910  Rs.3,600
 Rs.6,310

The firm should not accept the discount offer because it result into an annual
loss of Rs.6,310 – Rs.6,000 =Rs.310
 8-36
Given
Annual sales(R) =2,600,000kgs
Ordering cost(O)=Rs.5,000 per order
Cost price(P)=Rs.5 per kg
Safety stock(s)= 200,000 kg
Lead time = 6 weeks
The economic order quantity (EOQ)
 a.EOQ=?
We have:
EOQ=
2×2,600,000 ×Rs.5,000 = 161,245Kgs or 161,300 kgs
Rs.1

b. The total inventory costs (TIC)

TIC = total ordering cost + total carrying cost
= R/EOQ×O + EOQ/2 ×c
= 2,600,000/161,300 × Rs.5,000 +161300/2 ×Rs.1
= Rs.80,595.16 + Rs.80,650 =Rs.161,245
d. given,
Number of order(N)=4
Order size(Q)=R/N = 2,600,000/4 =650,000units
Discount = 1% of Rs.5 × 2,6000,000 = Rs.130,000
New purchases price per unit =Rs.5(1 – 0.01) =Rs.4.95
New carrying cost per unit = 0.20 × Rs.4.95 =Rs.0.99
Calculation of total inventory cost of discount offer.
We have
Total cost =R/Q ×O +Q/2 × c – discount
= 2,600,000/650,000 ×Rs.5,000 +650,000/2 ×Rs.0.99
– Rs.130,000
=Rs.20,000 + Rs.321,750 –Rs.130,000 = Rs.211,750
The firm should not accept the discount offers because it
results into an annual loss of Rs.211,750 – Rs.161,245
=Rs.50,505
C .ROL=?
We have,
ROL point = (safety stock +weekly usage × lead time– goods in transit
(GIT)
=(200,000+2,600,000 / 52 )× 6 – 161300
=200,000 + 300,000 – 161300
= 338700 kg

Now,
Goods in transit =52 /(2600,000/ 161,300 ) = 3.23.
Now 6/ 3.23 = 1.92
Goods in transit = 1 × 161300
= 161300
 Working notes = calculation of goods in transit

d. Total inventory costs (TIC)=?

We have,
TIC = TCC + TOC + cost of safety stock
= EOQ / 2 + A / EOQ × O + safety stock × C
= 510,000 / 2 ×(Rs.5 ×0.02) + 2,600,000 / 510,000 × Rs.5,000 + 200,000
×(Rs.5 ×0.02)
=Rs25,500 + Rs.25,490.20 + Rs.20,000
=Rs.70,990.20
d. Ordering costs would be reduced by Rs.3,500 to Rs.1,500. By ordering
650,000 bushels at a time, the firm can bring its total inventory costs to
Rs 58,500.
TIC= TCC + TOC + cost of safety stock
Q A
 C   O  safetystock  C
2 Q
650,000 2,600,000
 ( Rs.5  0.02)   Rs.5,000  200,000  ( Rs.5  0.02)
2 650,000
Rs.32,500  Rs.6,000  Rs.20,000
 Rs.58,500

Because the firm can reduce its total inventory costs by ordering 650,000 bushels
at a time, it should accept the offer and place larger orders.(Incidentally, this same
type of analysis is used to consider any quantity discount offer).