Problem 4:
The ABC Company provides the following information:
Estimated requirements for next year: 2400 units
Per unit Cost: Rs. 150
Ordering Cost (Per order): Rs. 20
Carrying Cost: 10%
From the above information you are required to calculate:
(a) Economic Order Quantity
(b) The Number of orders to be placed per year
(c) The Frequency of orders
(d) Prove your answer
Solution:
* From the above table, it is clear that if 3 orders are placed per year according to the Economic Order Quantity of 800 units per order; then the total cost (carrying + order cost) comes to Rs. 120 which is the lowest of all other different combinations. Hence it is proved that the most Economic Order Quantity is 800 units.
Note: When 800 units (EOQ) are purchased the ordering costs and carrying costs are equal.
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