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Economic Order Quantity (EOQ): Practical Problems and Solutions
Economic Order Quantity
(EOQ): Practical Problems
and Solutions
Written by True Tamplin, BSc, CEPF®
Updated on September 17, 2021
Problem 1
The John Equipment Company estimates its carrying cost
at 15% and its ordering cost at $9 per order. The estimated
annual requirement is 48,000 units at a price of $4 per unit.
Required:
1. What is the most economical number of units to
order?
2. How many orders should be placed in a year?
3. How often should an order be placed?
Solution
1. What is the most economical number of units to order?
Annual requirement = 48,000 units
Ordering cost = $9 per order
Carrying cost = 15% of per-unit cost
Per unit cost = $4 per unit
2. How many orders should be placed in a year?
= Annual requirement / EOQ
= 48,000 units / 1,200 units
= 40 orders
3. How often should an order be placed?
Frequency of orders = No. of days in one year / No. of
orders
= 360 days / 40 orders
= 9 days
Problem 2
To date, Raymond Bro. has been purchasing an item in lots
of 900 units. This equates to a three-month supply. The
cost per unit is $12, the order cost is $16 per order, and the
carrying cost is 25%.
Required: How much can Raymond Bro. save per year by
purchasing the item in the most economical quantities?
Solution
The first stage in our working is to compute the annual
requirement.
Given that 900 units amounts to a three-month supply, the
monthly requirement is 900 units / 3 months = 300 units.
Therefore, the annual requirement is 300 units x 12 months
= 3,600 units.
In turn, the EOQ can be computed as follows:
No. of Orders = 3,600 units / 900 units
= 4 orders
= 3,600 units / 196 units
= 18 orders approx.
Ordering Cost = 4 orders x $16 per order
= $64
Also, in the case of EOQ:
= 18 orders x $16 per order
= $288
Average Inventory = 900 units / 2
= 450 units
In the case of EOQ:
= 196 units / 2
= 98 units
Carrying cost = $3 x 450 units
= $1,350
In the case of EOQ:
= $3 x 98 units
= $294
Total cost = $64 + $1,350
$1,414
In the case of EOQ:
=$288 + $294
= $582
Saving = $1,414 – $582
= $832
Problem 3
A manufacturing company places a semi-annual order of
24,000 units at a price of $20 per unit. Its carrying cost is
15% and the order cost is $12 per order.
Required:
1. What is the most economical order quantity?
2. How many orders need to be placed?
Solution
No. of orders per year = Annual Requirement / EOQ
= 48,000 units / 620 units
= 77 orders approximately
To compute the annual requirement:
24,000 units are ordered semiannually, therefore:
Annual requirement = 24,000 units x 2 = 48,000 units.
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Frequently Asked Questions
What is the Economic Order Quantity (EOQ)
formula?
EOQ stands for economic order quantity. The formula is:
EOQ = √ (2xARxOC) / CC where AR = annual requirements,
OC = per unit cost, and CC = carrying cost per unit per year
of materials inventory
What does “efficient” mean? Explain why it is
so helpful in business.
Efficient means to use the minimum resources to achieve a
goal. In this case, it means minimizing your inventory
amount. It is helpful because it decreases the money you
spend on holding inventory, and lowers the risk of not
having enough inventory if a sudden increase was to
happen.
What are some examples of Economic Order
Quantity (EOQ) applications in real life?
Clothing stores order a certain amount in inventory at a
time to save on costs. A clothing store, for example, has an
EOQ of 10 and sales are going well. If the owner wanted to
make more money or generate more sales, they would
increase that EOQ amount so they won’t have to keep
placing orders as often, saving them time and money in the
process.
What are the advantages of calculating
Economic Order Quantity (EOQ)?
It minimizes carrying costs and saves time. You can also
save a substantial amount of money using this method
since you would not have to place as many orders reducing
supplier lead time
What are the disadvantages of calculating
Economic Order Quantity (EOQ)?
EOQ does not account for seasonal or economic
fluctuations which can cause huge differences in your
inventory levels. It does not take into account the random
nature of demand.
Related Posts
Material Costing: Practical Problems and Solutions
Cost Center and Cost Unit
Marginal Costing: Practical Questions and Solutions
Flexible Budget Practical Problems and Solutions
Economic Order Quantity (EOQ)
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of
UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), a
member of the Society for Advancing Business Editing and
Writing, contributes to his financial education site, Finance
Strategists, and has spoken to various financial
communities such as the CFA Institute, as well as
university students like his Alma mater, Biola University,
where he received a bachelor of science in business and
data analytics.
To learn more about True, visit his personal website, view
his author profile on Amazon, his interview on CBS, or
check out his speaker profile on the CFA Institute website.
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