ch22boc-model - EOQ =(2*F*S(C*P 0.5 = P C S F 2 EOQ = A B C...

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Chapter 22, Other Topics in Working Capital Management 3/19/03 1 and 2. THE ECONOMIC ORDERING QUANTITY (EOQ) MODEL Data for the example: S = annual units (autos) sold = 3,000 N = number of orders per year = 15 # units per order = S/N = 200 A = average inventory = # units per order / 2 = (S/N)/2 = 100 C = percentage carrying cost = 20.58% P = purchase price per car = $45,000 F = fixed costs per order = $2,000 Total carrying costs (TCC) = (C)(P)(A) = $925,921 Total ordering costs (TOC) = (F)(N) = $30,000 Total inventory cost (TIC) = TCC + TOC = $955,921 Economic order quantity (EOQ) = optimal quantity to be ordered 36 Data for EOQ Graph The EOQ model provides a pedagogically useful explanation of inventory theory. The following example (for an up-scale auto dealer) illustrates the model.
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Unformatted text preview: EOQ = [ (2*F*S) / (C*P) ] 0.5 = ) P )( C ( ) S )( F ( 2 EOQ = A B C D E F G H I 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Inventory Costs Costs as a function of Units ord Units ordered Carrying costs $925,921 1 $4,630 10 $46,296 20 $92,592 30 $138,888 40 $185,184 50 $231,480 60 $277,776 70 $324,072 80 $370,368 90 $416,664 100 $462,961 110 $509,257 120 $555,553 130 $601,849 140 $648,145 150 $694,441 160 $740,737 170 $787,033 180 $833,329 190 $879,625 200 $925,921 210 $972,217 220 $1,018,513 230 $1,064,809 0 10 20 30 40 50 60 70 80 90 100 $0 $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 Column I Column J Column K A B C D E F G H I 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49...
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