Problems on Economic Ordering Quantity
1. Calculate the economic order quantity for material M. The following details are furnished:
Annual usage = 90000 units
Buying cost per order = Rs. 10
Cost of carrying inventory = 10% of cost
Cost per unit = Rs.50
EoQ=❑√ 2 A B/C x S
A = Annual Consumption
B = Buying cost per order
C = Cost per unit
S = Storage and carrying cost (if it is given in % apply on cost of the material)
EoQ = ❑√ 2 x 90,000 units x 10/(50 x 10 %) = ❑√ 18,00,000/ 5
=❑√ 3,60,000 = 600 units
2) From the following information, calculate Economic Order Quantity and the number of orders
to be placed in one quarter of the year.
(a) Quarterly consumption of materials = 2000 kg
(b) Cost of placing one order = Rs. 50
(c) Cost per unit = Rs. 40
(d) Storage and carrying cost = 8% of average inventory
EoQ=❑√ 2 A B/C x S
A = Annual Consumption ( 2000 for quarterly and for annual = 2000x 4 = 8000)
B = Buying cost per order
C = Cost per unit
S = Storage and carrying cost (if it is given in % apply on cost of the material)
EoQ = ❑√ 2 x 8,000 x 50/(40 x 8 % ) = ❑√ 8,00,000/3.2 = 500 kgs
Number of orders to be placed in one quarter = Material consumption per quarter / EoQ per order
= 2000 kgs / 500
= 4 orders
3. Following information relating to a type of raw material is available:
Annual demand 2400 units
Unit Price Rs. 2.40 - C
Ordering cost per order Rs. 4.00 - B
Storage cost 2% per annum
Interest rate 10% per annum
Calculate Economic Order Quantity.
EoQ=❑√ 2 A B/C x S
A = Annual Consumption
B = Buying cost per order
C = Cost per unit
S = Storage and carrying cost (if it is given in % apply on cost of the material)
Interest rate is not considered and treated as non-storage cost
EoQ = ❑√ 2 x 2400 x 4 /(2.40 x 2% ) = ❑√ 19200/0.048 = 632 units
Note: Interest payment is considered as storage cost and in the storage and carrying cost and the loan is
taken for the purpose of capital expenditure on storage.
EoQ = ❑√ 2 x 2400 x 4 /(2.40 x 12% ) = ❑√ 19200/0.288 = 258 units
4. A Company manufactured 5000 units of a product per month. Cost of placing an order is Rs.
100. The purchase price of raw material is Rs. 10 per kg. The re-order period is 4 to 8 weeks.
The consumption of raw materials varies from 100 kg to 450 kg per week, the average
consumption being 275 kg; the carrying cost of inventory is 20% per annum. Calculate (a) Re-
order Quantity & (b) Re-order level.
EoQ=❑√ 2 A B/C x S
A = Normal consumption of material per week x 52 = 275 per week x 52 weeks
A= 14,300 units of materials
B = 100
C = 10 per unit
S = 20%
a. Re-order quantity or EoQ = ❑√ 2 x 14,300 x 100/(10 x 20 %) = ❑√ 2860000/2 = 1,196 units
b. Re-order Level = Max consumption x maximum re-order period
= 450 x 8
= 3,600 units.
5. A Company uses 2500 units of a material per month. Cost of placing an order is Rs. 150. The
cost per unit is Rs. 20. The re-order period is 4 to 8 weeks. The minimum consumption of raw
material is 100 units whereas the average consumption is 275 units. The carrying cost of
inventory is 20% per annum. Calculate (a) Re-order Quantity & (b) Re-order level.
A = 2500 x 12 (as it is given clearly, that’s why did not take the average consumption)
= 30,000
B = 150
C = 20
S = 20%
a. Re-order quantity or EoQ = ❑√ 2 x 30000 x 150/(20 x 20 %) = ❑√ 90,00,000/4 = 1,500 units
b. Re-order Level = Max consumption x Max ordering period
= 450 x 8 weeks
= 3,600 units.
Average consumption =( Min consumption + max consumption) / 2
275 = (100 + Max cons) /2
275 x 2 = 100 + max consumption = 450 units.
6. XY Co. requires 1500 units of a material per month, each costing Rs. 27. Cost per order is Rs.
150 and the inventory carrying charges work out to 20% of the average inventory. Find out the
economic order quantity and the number of orders per year.
A = 1500 x 12 = 18,000 units
B = 150
C = 27
S = 20%
EoQ = ❑√ 2 x 18,000 x 150/(27 x 20 %) = ❑√ 54,00,000/5.4 = 1,000 units
No of orders per year = No of units required per year / eoq
= 18,000 / 1000 = 18 orders per year
