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Calculating EOQ and total inventory cost in the given case

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Ergonomics Inc. sells ergonomically designed office chairs. The company has the following information:
-Average demand 20 units per day
-Average lead time  30 days
-Item unit cost  $50 for orders of less than 200 units
-Item unit cost  $48 for orders of 200 units or more
-Ordering cost  $25
-Inventory carrying cost  25%
-The business year is 250 days

The basic question: How many chairs should the firm order each time? Assume there is no uncertainty at all about the demand or the lead time. There are many associated questions, such as what will the firm's average inventory be under each alternative? What will be the breakdown of costs for each alternative?

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Solution Summary

The solution depicts the steps to estimate the economic order quantity in a case where quantity discounts are provided. How many chairs a firm should order each time are determined.

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D =Total demand= 250*20=5000 units per year
S = ordering cost=$25 per order

Case-1 Unit cost is $50 (ordered quantity is less than 200 units)

P = Item purchase price = $50.00 per unit
H=Holding cost per year=25% of $50=$12.50
EOQ=(2DS/H)^0.5=(2*5000*25/12.50)^0.5=141.4214 or 141 units

Case-2 Unit cost is $48 (ordered quantity is 200 or more)
P = Item ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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