EOQ - Economic Order Quantity
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A wholesale distributor of lenses and frames has been seeking to minimize its inventory costs and is planning to apply the economic order quantity model to its main product, lens blanks. The data in the next column are available for the next year.
Demand 1,000,000 units
Average unit costs $20.00
Cost of ordering $72.00 per order
Unit carrying costs 5% of average per unit cost
Management believes it can reduce the cost of ordering to $50.00 by implementing an online ordering system with the lens manufacturer.
If management does not implement the online ordering system, assume that its EOQ will be 12,000 units.
If, however, management decides to implement the online ordering system, this will change the economic order quantity and save the company ordering costs by what amount?
Increase (Decrease) in EOQ Order Cost Savings (Expenditures) for EOQ Change
2,000 units $(1,000)
600 units $(13,200)
(2,000) units $1,000
1,100 units $22,000
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Solution Summary
The solution shows the change in the economic order quantity as a result of change in management decision regarding online ordering.
Solution Preview
New EOQ =
EOQ = Square-root of 2SP/C
Where: S = Annual usage in units
P = Ordering cost per order.
C = Carrying cost per unit
= Square root of (2 * 1,000,000 units * $50) / $1
= 10,000 ...
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