Ch. 12: Inventory Management
Practice problems on EOQ
Problem 1
A company makes bicycles. It produces 450 bicycles a month. It buys the tires for bicycles from a
supplier at a cost of $20 per tire. The company’s inventory carrying cost is estimated to be 15% of cost
and the ordering is $50 per order.
a.
Calculate the EOQ
In this problem:
D = annual demand = (2 tires per bicycle) x (450 bicycles per month) x (12 months in a year)
= 10,800 tires
S = ordering cost = $50 per order
H = carrying cost = (15%) x ($20 per unit) = $ 3.00 per unit per year
EOQ = Square root of { (2 x 10,800 x $50) / $3 = Square root of 400,000 = 600 tires
The company should order about 600 tires each time it places an order.
b.
What is the number of orders per year?
Number of orders per year = D / Q = 10,800 / 600 = 18 orders per year
c.
Compute the average annual ordering cost.
Average annual ordering cost = (18 orders per year) x ($50 per order) = $900 per year
d.
Compute the average inventory.
Average inventory = Q / 2 = 600 / 2 = 300 tires
e.
What is the average annual carrying cost?
Average annual carrying cost = (average inventory) x (H)
= (300 tires) x ( $3) = $900 per year
f.
Compute the total cost.
Total cost = (Average annual ordering cost) + (average annual carrying)
= ($900) + ($900) = $1,800
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Problem 2
Consider the previous problem.
If the company orders the item once a quarter
a.
Compute the number of orders per year.
Since the company is placing orders once a quarter, the number of orders must 4
b.
What is order quantity?
Order quantity = 10,800 / 4 = 2,700 tires.
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 Winter '10
 Verma
 Balance Sheet, Equals sign, $1,800, annual ordering cost

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