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There were products P and Q with the following characteristics 


Product

Demand
(units)

Order cost
(Rs./order)

Holding cost
(Rs. unit/year)
P 100 50 4
Q 400 50 1

The economic order quantity (EOQ) of products P and Q will be in the ratio


1. 1 : 4
2. 1 : 2
3. 1 : 1
4. 1 : 8

1 Answer

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Best answer
Correct Answer - Option 1 : 1 : 4

Concept:

  • Economic order quantity (EOQ): Economic order quantity is that size of order which minimizes total cost when ordering cost is equal to carrying cost.
  • 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\(\sqrt {\frac{{2\; \times \;D\; \times \;{C_o}}}{{{{\bf{C}}_{\bf{c}}}}}} \), EOQ\(\sqrt {\frac{{2\; \times \;100\; \times \;50}}{{4}}} \)

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, \(\frac{EOQ_p}{EOQ_Q}~=~\frac{50}{200}~=~\frac{1}{4}\)

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