Page 198 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Unit 12: Inventory Management

= ` (43,800 + 1200) = ` 45,000.00 Notes
The loss to the company = ` 45,000 – ` 14,400 = ` 30,600.00
Reorder Level: R = L × D = (6/12) × 1200 = 600 units
B
The company should place orders for economic lot sizes of 900 units in each order. It should have
a reorder level at 600 units.

Example: A manufacturer has to supply his customers 600 units of his product per year.
Shortages are not allowed and the inventory carrying cost amounts to ` 0.60 per unit year. The
set up cost per run is ` 80. Find:
(i) The Economic order Quantity.
(ii) The minimum average yearly cost.

(iii) The optimum number of orders per year.
(iv) The optimum period of supply per optimum order.
(v) The increase in the total cost associated with ordering 20 per cent more than EOQ.
Solution:
We are given:

D = Total number of unit supplied per unit time period = 600 units
A = Set up cost per run = ` 80
r = Inventory carrying cost per unit per year = ` 0.60.

(i) Economic order quantity is given by:
Q EOQ = (2DA/r)

= 400 units
(ii) Minimum average yearly cost is given by:

T EOQ = (D × A)/Q EOQ + (Q EOQ × r)/2
= (600 × 80)/400 + (400 × 0.60)/2
= ` 240.
(iii) The optimum number of orders per year is:
N EOQ = D/Q EOQ = 600/400 = 3/2

(iv) The optimum period of supply per optimum order is:
T EOQ = 1/N EOQ = 1/(3/2)
= 2/3

(v) Ordering 20% higher than EOQ:
Ordering quantity = (120 × 400)/100 = 480 units
With
Q EOQ = 400 and Q = 480,
The ratio k = Q/Q EOQ = 480/400 = 1.2

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