Optimum Order Quantity - EOQ Analysis
Not what you're looking for?
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?
Purchase this Solution
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.
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 ...
Purchase this Solution
Free BrainMass Quizzes
Cost Concepts: Analyzing Costs in Managerial Accounting
This quiz gives students the opportunity to assess their knowledge of cost concepts used in managerial accounting such as opportunity costs, marginal costs, relevant costs and the benefits and relationships that derive from them.
Motivation
This tests some key elements of major motivation theories.
Basic Social Media Concepts
The quiz will test your knowledge on basic social media concepts.
Business Ethics Awareness Strategy
This quiz is designed to assess your current ability for determining the characteristics of ethical behavior. It is essential that leaders, managers, and employees are able to distinguish between positive and negative ethical behavior. The quicker you assess a person's ethical tendency, the awareness empowers you to develop a strategy on how to interact with them.
Operations Management
This quiz tests a student's knowledge about Operations Management