Part 1: A company is using the Economic Order Quantity (EOQ) model to manage its
ID: 403228 • Letter: P
Question
Part 1:
A company is using the Economic Order Quantity (EOQ) model to manage its inventories. Suppose its inventory holding cost per unit per year doubles while the annual demand and the ordering cost per order do not change. What will happen to the EOQ?
**Please explain answer
It doubles.
It increases by 41.42%.
It remains the same.
The EOQ reduces by about 30%.
It quadruples (increases by 400%).
Part 2:
A manufacturing company sells its products directly to customers and operates 5 days a week, 52 weeks a year. The production department of this company can produce at the rate of 60 units per day. The setup cost for a production run is $ 125.00. The cost of holding is $ 4.00 per unit per year. The demand for the item is continuous and constant and is 3,900 units per year. (Note: The demand occurs only when the company is operating, that is, 5 days a week for 52 weeks). Find the optimum number of units to be produced in one batch (economic production quantity). Round the number to nearest integer.
It doubles.
It increases by 41.42%.
It remains the same.
The EOQ reduces by about 30%.
It quadruples (increases by 400%).
Explanation / Answer
Part 1 :
EOQ = Sqrt (2*C*R/F) where
P = Purchase cost per unit
R = Forecasted Annual usage
C = Cost per order event (not per unit)
F = Holding cost factor
So EOQ is Directly Proportional to Sqrt(1/F), when other variables are constant
So If Orig F = 16, EOQ is Prop to Sqrt(1/16) = 0.25
When F doubles ie F=32,EOQ = SQRT(1/32) = 0.18
So EOQ reduces by (0.25-0.18)/0.25 = 28.00%
So Correct Answer is "The EOQ reduces by about 30%."
Part 2:
EOQ = Sqrt (2*C*R/F) where
R = Forecasted Annual prod = 60 unit pd*5day pw*52w
= 60*5*52 = 15600 units
C = Setup cost = $125
F = Holding cost factor = $4
So EOQ = Sqrt (2*C*R/F)
ie EOQ = SQRT(2*125*15600/4) = 987
So optimum number of units to be produced in one batch (economic production quantity) = 987