Economic Order Quantity

FM – L2 – Q109 – Inventory Management

Calculate the EOQ for an item with given demand, costs, and holding expenses to minimize annual costs.

Question

Entity G uses 105 units of an item of inventory every week. These cost GH₵150 per unit. They are stored in special storage units and the variable costs of holding the item is GH₵4 per unit each year plus 2% of the inventory’s cost.

Required
(a) If placing an order for this item of material costs GH₵390 for each order, what is the optimum order quantity to minimise annual costs? Assume that there are 52 weeks in each year.

(b) Suppose that the supplier offers a discount of 1% on the purchase price for order sizes of 2,000 units or more. What will be the order size to minimise total annual costs?

Answer

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Tags: Cost Optimization, Discount Analysis, Economic Order Quantity, Inventory Management
Level: Level 2

Topic: Inventory Management

FM – L2 – Q107 – Inventory Management

Evaluate if Kweku Ltd should accept a foreign supplier's discount offer for groundnut orders, comparing EOQ and special order costs.

Question

Kweku Ltd, a manufacturer of groundnut paste, is evaluating whether to continue with its economic order quantity (EOQ) or accept a special order from a foreign supplier for groundnut purchases. The relevant financial data is provided below:

Description	Value
Purchase price per bag of groundnut	GH¢360
Holding cost per annum (10% of the cost of a bag of groundnut)	GH¢36
Ordering cost per order	GH¢7.70
Annual demand of groundnut paste	6,240 bags
Normal usage per month	520 bags
Minimum usage per month	Not specified
Maximum usage	Not specified

Required:
The foreign supplier offers an 8% reduction in the price per bag of groundnut if Kweku Ltd orders 3,000 bags each time. Advise Kweku Ltd on whether to accept the supplier’s offer.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Cost analysis, Economic Order Quantity, Groundnut Paste Manufacturing, Inventory Management, Supplier Discount
Level: Level 2

Topic: Inventory Management

Tag (SQ): Economic Order Quantity

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FM – L2 – Q109 – Inventory Management

Calculate the EOQ for an item with given demand, costs, and holding expenses to minimize annual costs.

FM – L2 – Q107 – Inventory Management

Evaluate if Kweku Ltd should accept a foreign supplier's discount offer for groundnut orders, comparing EOQ and special order costs.

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Tag (SQ): Economic Order Quantity

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FM – L2 – Q109 – Inventory Management

Calculate the EOQ for an item with given demand, costs, and holding expenses to minimize annual costs.

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FM – L2 – Q107 – Inventory Management

Evaluate if Kweku Ltd should accept a foreign supplier's discount offer for groundnut orders, comparing EOQ and special order costs.

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