Example of Economic Order Quantity
The EOQ model supposes:
- Annual demand is recognized
- Hold costs are constant and recognized
- Ordering costs are recognized and constant
- The same quantity is ordered every instance an order is made as demand as assumed not to fluctuate considerably.
Example
ABC Ltd has an aggregate demand of 1.2 Million units. All time they put an order there is an ordering cost of shs 1,000, holding cost is shs 100 per unit. Find out:
i. EOQ
ii. No. of order to be made based EOQ
iii. Net cost of stocks based on the EOQ
Solution
EOQ = √(aDCo/Ch)
= (2 x 1200000 x 1000)/100
= 489 units
i) No of order = 1200000/4899
= 244.9
≈ 245 Orders
ii) Net cost = DCo/Q + (½ QCh)
= 1200000 (1000) /4899 + ½ (4899)100 = 489,900