Calculation of EOQ Most textbooks consider that the optimal re-order quantity for materials occurs when the cost
Question:
Calculation of EOQ Most textbooks consider that the optimal re-order quantity for materials occurs when ‘the cost of storage is equated with the cost of ordering’. If one assumes that this statement is acceptable and also, in attempting to construct a simple formula for an optimal re-order quantity, that a number of basic assumptions must be made, then a recognized formula can be produced using the following
You are required:
(a) to present formulae, using the symbols given above, representing: (i) total cost of ordering, (ii) total cost of storage, (iii) total cost of ordering and storage, (iv) optimal re-order quantity; (4 marks)
(b) to state the limitations experienced in practice which affect the user of the formula for optimal re-order quantity as expressed in
(a) (iv) above; (4 marks)
(c) to calculate the optimal re-order quantity from the following data: Cost of storage is 20% per annum of stock value Cost of placing an order is 30 each Demand for material is 2000 units per annum Price of material is 70 per unit; (3 marks)
(d) to explain a system of stock usage which renders economic order quantity re-ordering obsolete.
Step by Step Answer:
