Page 268 - DCOM303_DMGT504_OPERATION_RESEARCH

Unit 13: Inventory Control

Notes
Example: A foundry regularly uses 1,000 folds per day for 250 days in a year. Folds can be
purchased in the lots of 1,000 for ` 10 per lot or in lots of 10,000 for ` 96.10 per lot. Ordering costs
are ` 10 per order and the holding costs of items in inventory are estimated to be 20% of cost per
year.
1. What is the EOQ and associated annual cost assuming that only lots of 1,000 items are
available?

2. What is the EOQ and the associated annual cost assuming that only lots of 10,000 items are
available?
3. Compare the costs of the two answers above and state the optimal ordering policy for
these folds assuming that lots of 1,000 or 10,000 items can be ordered.
Solution:
Step 1: Calculation of EOQ and the associated annual cost when only lots of 1,000 items are there

1. Usage per day 1,000 folds for 250 days
= 1,000 × 250 days
= 2,50,000 folds p.a.
2. Purchase price: ` 10 per lot of 1,000 folds

`
= = ` 0.01 Per unit

3. Ordering cost ` 10 per order
4. Carrying cost is 20% p.a.
Step 2: Calculation of EOQ and the associated annual cost when only lots of 10,000 items are
there
1. Usage p.a 2,50,000 folds
2. Purchase price : ` 96.10 per lot of 10,000 folds

= ` = ` 0.00961 per unit
3. Ordering cost ` 10 per unit
4. Carrying cost is 20% p.a.
Step 3: Calculation of EOQ by using equation

EOQ =

1. When purchase price is ` 0.01/unit
`
=
`

= 51,004 units

LOVELY PROFESSIONAL UNIVERSITY 263