Question

The annual demand of valves per year in a company is 10,000 units. The current order quantity is 400 valves per order. The holding cost is Rs. 24 per valve per year and the ordering cost is Rs. 400 per order. If the current order quantity is changed to Economic Order Quantity, then the saving in the total cost of inventory per year will be Rs. ______ (round off to two decimal places).

Answer 1

Concept:

\(EOQ = \sqrt {\frac{{2D{C_0}}}{{{C_h}}}} \)

D = Annual demand, C0 = order cost/setup cost, Ch = holding cost per unit per year

Total inventory cost (TIC) = Ordering cost + Holding cost

For EOQ 

\(TIC* = \sqrt {2 \times D \times {C_0} \times {C_h}} \)

Calculation:

Given:

Annual demand, D = 10,000 units, Q = Rs. 400 per order, Holding cost (C_h) = 24/- unit/year, Ordering cost (C₀) = 400/- per order

(TIC)_I = Ordering cost + Holding cost

\(= \frac{D}{Q} \times {C_0} + \frac{Q}{2} \times {C_h}\)

\(= \frac{{10,000}}{{400}} \times 400 + \frac{{400}}{2} \times 24 = Rs.\;14800/yea\)

For EOQ order quantity,

\(TIC* = \sqrt {2 \times D \times {C_0} \times {C_h}} \)

\(= \sqrt {2 \times 10,000 \times 400 \times 24} = Rs.\;13856.4/year\)

Saving in the total inventory cost per year

= (TIC)_I – TIC*

= 14800 – 13856.4 = Rs. 943.594/year