Ordering/Holding Cost TradeOff
1
•
Total Cost
first falls as
units
ordered
increase,
but then
begins to
increase.
•
The
optimum
Ordering Costs =
[
F
х
(
T/Q
)
]
Order Quantity (
Q
)
$
Holding Cost =
[
H
х
(
Q
/2)
]
T
= Total
inventory units
demanded
Q
= Order
quantity
F
= Fixed Order
Cost per order
H
= Holding Cost
per inventory
unit
D
= # days in
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•
A firm estimates the need for:
–
500,000 tons of scrap metal over a
planning
period
–
Sales are not seasonal and are stable
–
Ordering Costs are $20.00/order
–
Holding Costs are $1.25/ton
–
The price is $0.50/unit (no discounts offered)
–
The metal can be stored outside and is not
insured
Optimal Quantity (EOQ) Example
Total Cost
= [
F
х
(
T/
Q
)
]
+
[
H
х
(
Q
/2)
]
There exists some
Q
that minimizes the Total Cost
.
= [$20.00 х
(500,000
/
Q
)
]
+
[$1.25
х
(
Q
/2)
]
T
= Total
inventory units
demanded
Q
= Order
quantity
F
= Fixed Order
Cost per order
H
= Holding Cost
per inventory unit
D
= # days in
production period
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 Spring '12
 VictorWakeling
 Operations Research

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