OPM 501
OPERATIONS MANAGEMENT
ASSIGNMENT FOR MID TERM 2 AND FINAL EXAM
1. What is the EOQ and what is the lowest total cost?
Economic order quantity (EOQ) is that the ideal order quantity an organization can buy to reduce
inventory costs like holding costs, shortage costs, and order costs. The EOQ is employed as a part
of endless review inventory system within which the amount of inventory is monitored in the
slightest degree times and a set quantity is ordered anytime the inventory level reaches a
selected reorder point. The EOQ provides a model for calculating the acceptable reorder point
and also the optimal reorder quantity to confirm the instantaneous replenishment of inventory
with no shortages. It is a valuable tool for small businesses who must make decisions about what
quantity inventory to keep, what number items to order anytime, the frequency of reordering to
incur the minimum possible costs.
The formula for EOQ is:
Q=
√ 2 DS
H
where:
Q=EOQ units
D=Demand in units
S=Cost per order
H=Holding costs
We can find the Lowest Total Cost when ordering cost and the inventory carrying cost are at
there minimum as because the inventory cost is constant. It is obtained at the point of EOQ.
Total Inventory = Ordering Costs + Carrying Costs
Ordering Costs= S × N
Ordering Costs= S × D/Q
Carrying Costs= H × Q/2
D Q
TC =S× +H ×
Q 2
,2. What is the annual cost of holding inventory at the EOQ and the annual cost of ordering
inventory at the EOQ?
Annual cost of holding inventory at the EOQ is annual holding costs that are associated with
storing inventory that remains unsold. These costs are one component of total inventory costs,
which also includes ordering and shortage costs. A firm's holding costs include the price of
products damaged or spoiled, along with labor, space for storing and insurance.
Annual cost of ordering inventory at the EOQ are the annual expenses incurred to create and
process an order to a supplier. Examples of ordering costs are:
❖ preparation cost of a purchase requisition
❖ preparation cost for a purchase order
❖ labor cost required to inspect received goods
❖ cost incurred to put away goods after receiving
❖ processing cost of supplier invoice regarding the order
❖ preparation and issuing cost of payment to the supplier
, 3. How much does the total cost increase if the store manager orders twice as many bird feeders as
the EOQ? How much the total cost increase if the store manager orders half as many bird
feeders as the EOQ?
To find out the increase in total cost when:
• the store manager orders twice as many bird feeders as the EOQ,
• the store manager orders half as many bird feeders as the EOQ,
let us consider the following example.
Suppose, in a company XYZ, the cost per order is $500 and the annual holding cost per unit is
$10. The demand in units is 10,000 units.
D = 10,000 units
S = $500
H = $10 per unit per annum
Therefore,
√
2 DS
EOQ=
H
EOQ=
√ 2× 10000× 500
10
EOQ=1000 units
Here the total cost will be,
D Q
TC =S× +H ×
Q 2
10000 1000
TC =500× +10 ×
1000 2
TC =$ 10000
Now, if we double the EOQ, which will be 2000 units, in that case total cost will be,
10000 2000
TC =500× +10 ×
2000 2
TC =$ 12500
OPERATIONS MANAGEMENT
ASSIGNMENT FOR MID TERM 2 AND FINAL EXAM
1. What is the EOQ and what is the lowest total cost?
Economic order quantity (EOQ) is that the ideal order quantity an organization can buy to reduce
inventory costs like holding costs, shortage costs, and order costs. The EOQ is employed as a part
of endless review inventory system within which the amount of inventory is monitored in the
slightest degree times and a set quantity is ordered anytime the inventory level reaches a
selected reorder point. The EOQ provides a model for calculating the acceptable reorder point
and also the optimal reorder quantity to confirm the instantaneous replenishment of inventory
with no shortages. It is a valuable tool for small businesses who must make decisions about what
quantity inventory to keep, what number items to order anytime, the frequency of reordering to
incur the minimum possible costs.
The formula for EOQ is:
Q=
√ 2 DS
H
where:
Q=EOQ units
D=Demand in units
S=Cost per order
H=Holding costs
We can find the Lowest Total Cost when ordering cost and the inventory carrying cost are at
there minimum as because the inventory cost is constant. It is obtained at the point of EOQ.
Total Inventory = Ordering Costs + Carrying Costs
Ordering Costs= S × N
Ordering Costs= S × D/Q
Carrying Costs= H × Q/2
D Q
TC =S× +H ×
Q 2
,2. What is the annual cost of holding inventory at the EOQ and the annual cost of ordering
inventory at the EOQ?
Annual cost of holding inventory at the EOQ is annual holding costs that are associated with
storing inventory that remains unsold. These costs are one component of total inventory costs,
which also includes ordering and shortage costs. A firm's holding costs include the price of
products damaged or spoiled, along with labor, space for storing and insurance.
Annual cost of ordering inventory at the EOQ are the annual expenses incurred to create and
process an order to a supplier. Examples of ordering costs are:
❖ preparation cost of a purchase requisition
❖ preparation cost for a purchase order
❖ labor cost required to inspect received goods
❖ cost incurred to put away goods after receiving
❖ processing cost of supplier invoice regarding the order
❖ preparation and issuing cost of payment to the supplier
, 3. How much does the total cost increase if the store manager orders twice as many bird feeders as
the EOQ? How much the total cost increase if the store manager orders half as many bird
feeders as the EOQ?
To find out the increase in total cost when:
• the store manager orders twice as many bird feeders as the EOQ,
• the store manager orders half as many bird feeders as the EOQ,
let us consider the following example.
Suppose, in a company XYZ, the cost per order is $500 and the annual holding cost per unit is
$10. The demand in units is 10,000 units.
D = 10,000 units
S = $500
H = $10 per unit per annum
Therefore,
√
2 DS
EOQ=
H
EOQ=
√ 2× 10000× 500
10
EOQ=1000 units
Here the total cost will be,
D Q
TC =S× +H ×
Q 2
10000 1000
TC =500× +10 ×
1000 2
TC =$ 10000
Now, if we double the EOQ, which will be 2000 units, in that case total cost will be,
10000 2000
TC =500× +10 ×
2000 2
TC =$ 12500
