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The monthly consumption of an item is 500 units. The price per unit is Rs. 25. The inventory carrying cost is 16% of item cost and ordering cost is Rs. 50 per order. For an economic order quantity model, determine the Re-order quantity
1. 380 units
2. 370 units
3. 378 units
4. 388 units

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Correct Answer - Option 4 : 388 units

Concept:

Basic EOQ Model:

The objective of this model is to minimize total annual cost by means of controlling inventory levels.

It is a best-ordered quantity where the total annual cost is minimum.

In Basic EOQ model,

Annual carrying(Holding) cost = Annual ordering cost

∴ to minimize total cost, EOQ(Q) is given by,

\(Q = \sqrt {\frac{{2D{C_0}}}{{{C_c}}}} \), where D= Annual demand, C0= Ordering cost per order, Cc= Carrying cost per unit per year, Cu= per unit material cost.

Calculation:

Given:

D = 500 × 12 = 6000 units per year, Cu= Rs. 25 per unit, Cc= 16% of Cc= 0.16 × 25= Rs. 4 per unit per year,

C0= Rs. 50 per order, Q = ?

Now, we know that

\(Q = \sqrt {\frac{{2D{C_0}}}{{{C_c}}}} \)

∴ \(Q = \sqrt {\frac{{2 \times 6000 \times 50}}{4}} = 388\;units\)

Therefore the Re-order quantity is 388 units.

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