Tiger Corp purchases 1,200,000 units per year of one component. The fixed cost per order is $25. The annual carrying cost of the item is 27% of its $2 cost.

a) Determine the EOQ under each of the following conditions: (1) no changes, (2) order cost of zero, and (3) carrying cost of zero.

b) What do your answers illustrate about the EOQ model? Explain?

Solution Preview

Finding the optimum order quantity in the above example, Q= SQRT(2CD/H), we find:

a) (1) with no changes, Q=SQRT(2CD/H)=SQRT(2(25)(1,200,000)/$0.54)=10,540 units
(2) order cost of zero, Q=SQRT(2CD/H)=SQRT(2(0)(1,200,000)/$0.54)=0 units
(3) carrying cost of zero, Q=SQRT(2CD/H)=SQRT(2(25)(1,200,000)/$0.00)=Undefined or Infinity

b) The answers from part a illustrate that the EOQ model isn't perfect in practice as it is a mathematical equation subject to certain limitations. For example, the optimum order quantity under normal circumstances (part 1) came to 10,540 units. For part 2, we used an order cost of zero which made the numerator zero rendering the answer zero. Again, in part 3 we ...

Solution Summary

The solution calculates the EOQ for a product under varying conditions and explains some of the inferences about the EOQ that can be made as a result of the calculations.

... Given: Annual tire requirement : 5,000 tires Ordering cost : $125 ... the optimum quantity of tires to order should be ... 2. Optimal number of orders per year Annual ...

... cost would be higher than if we ordered 13.86 units ... The formula for the optimal size of each order (called the EOQ, Economic Order Quantity), is given by ...

... Annual Ordering Cost = Cost per order x No. ... Annual Ordering Cost = $50. 4. Length of Inventory Cycle. No. of optimum orders per year Length of Inventory Cycle ...

EOQ to Minimize Annual Cost. ... Thank You. This solution contains the optimal order quantity calculation to minimize ordering cost, inventory carrying cost and ...

... operating days between orders, based on the optimal ordering policy. ... and the order quantity per order=19200/26.67 ... is a lot higher than the cost by ordering EOQ. ...

... to provide a recommendation of the optimal order quantity of raw ... of inventory that must be ordered in order... of moving goods from the customer order through the ...

... It indicates the optimal order size that minimizes total ...Ordering cost consists of the costs incurred in ... to physical activities required to process the order. ...

... to receive an order of coal, how much coal should be on hand when an order is placed? ... a. The optimal quantity of coal is , where C is the ordering cost, D ...

... inventory system where inventory level is tracked at all times with, and an exact quantity is ordered each time ... The optimal plan is ... Periodic Order Quantity (POQ ...