Intermediate: Calculation of EOQ XYZ Ltd produces a product which has a constant monthly demand of 4000 units. The product requires a component which XYZ Ltd purchases from a supplier at £10 per unit. The component requires a three-day lead time from the date of order to the date of delivery. The ordering cost is £0.60 per order and the holding cost is 10% per annum.

(a) You are required to calculate:

(i) The economic order quantity.

(ii) The number of orders required per year.

(iii) The total cost of ordering and holding the components for the year.

(b) Assuming that there is no safety stock and that the present stock level is 400 components, when should the next order be placed? (Assume a 360-day year.)

(c) Discuss the problems which most firms would have in attempting to apply the EOQ formula.

LO1