1 EOQ without discount. 2 2A0 2 x 250 x 20 EOO = = = 2,500 = 50 units. 4 Prices with discount : 5% Discount 30 - 5% = 3. 28.50 10% Discount 30 - 10% = 3. 27.00 12% Discount 30 - 12% = 1. 26.40 Order size (units) No. of orders in a year Statement of Total Cost at Various Order Sizes Ordering Cost Carrying Cost Purchase Cost (2) (2) of average inventory (3) Total Cost (2) (3 + 4 + 5) 1 2 3 4 5 6 250 50 5 5 x 20 = 100 50 -X4=100 2 250 x 28.50 = 7,125 7.325 50 100 250 = 2.5 100 2.5 x 20 = 50 100 x 4 = 200 2 250 x 27 = 6.750 7.000 923 125 250 = 2 125 2 x 20 = 40 125 x 4 = 250 250 x 27 = 6,750 7,040 200 250 = 1.25 1.25 x 20 = 25 200 200 x 4 = 400 2 250 x 26.40 = 6,600 7.025 250 250 = 1 250 1 x 20 = 20 250 x 4 = 500 2 250 x 26.40 = 6,600 7.120 Thus Optimal order quantity (EOQ) is 100 units and minimum total cost of inventory and purchasing cost. 7,000. Theoretically it may be 2.5 orders, but practically 3 orders will be required. Then the ordering cost would be . 60 and total cost 7,010. Illustration 30: A Company is considering the possibility of purchasing from a supplier a component it now makes. The supplier will provide the components in the necessary quantities at a unit price of .9. Transportation and storage costs would be negligible. The company produces the component from a single raw material in economic lots of 2,000 units at a cost of 2 per unit. Average annual demand is 20.000 units. The annual holding cost is 3. 0.25 per unit and the minimum stock level is set at 400 units. Direct labour costs for the component are . 6 per unit, fixed manufacturing overhead is charged at a rate of 3 per unit based on a normal activity of 20,000 units. The Company also hires the machine on which the components are produced at a rate of . 200 per month Should the Company make the component