Correct Answer - Option 1 : 1 : 4
Concept:
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Economic order quantity (EOQ): Economic order quantity is that size of order which minimizes total cost when ordering cost is equal to carrying cost.
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Ordering cost: It is the cost associated with the ordering of raw materials for production purpose.
- Ordering cost = number of orders × cost of placing an order (Rs/order)
- Inventory carrying cost = (Average inventory for a period) × (cost/unit/time)
Economic order quantity is given by:
EOQ = \(\sqrt {\frac{{2\; \times \;D\; \times \;{C_o}}}{{{{\bf{C}}_{\bf{c}}}}}} \)
where, D = Demand rate, Co = Cost of ordering per unit, Cc = Cost of carrying inventory per unit per time
Calculation:
Given:
For Product P:
Cost of ordering per unit (Co) = Rs 50, Demand rate (D) = 100 units per year, Cost of carrying inventory per unit per time (Cc) = Rs 4
Economic order quantity can be calculated as:
EOQp = \(\sqrt {\frac{{2\; \times \;D\; \times \;{C_o}}}{{{{\bf{C}}_{\bf{c}}}}}} \), EOQp = \(\sqrt {\frac{{2\; \times \;100\; \times \;50}}{{4}}} \)
EOQp = 50 __________(1)
For Product Q:
Cost of ordering per unit (Co) = Rs 50, Demand rate (D) = 400 units per year, Cost of carrying inventory per unit per time (Cc) = Rs 1
Economic order quantity can be calculated as:
EOQQ = \(\sqrt {\frac{{2\; \times \;D\; \times \;{C_o}}}{{{{\bf{C}}_{\bf{c}}}}}} \), EOQQ = \(\sqrt {\frac{{2\; \times \;400\; \times \;50}}{{1}}} \)
EOQQ = 200 ________(2)
From equation 1 and 2 we have, \(\frac{EOQ_p}{EOQ_Q}~=~\frac{50}{200}~=~\frac{1}{4}\)