Question

If the demand is 300 units per year, inventory holding cost is Rs. 8 per unit per year, shortage cost is Rs. 10 per unit per year and setup cost is Rs. 500 per replenishment. Determine EOQ and the maximum shortage level.

Answer 1

Given : R = 300 unit per year, 

C₁ = Rs. 8 per unit per year. 

C₂ = Shortage cost = Rs. 10 per unit per year, 

C₃ – Setup cost = Rs. 500 per replenishment. . 

The economic order quantity is

Q° = 259.80 = 260 units. 

The maximum shortage level is – (Q° – S°) Here S°: 

Maximum inventory level.

∴ (Q°-S°) = 2.59.80- 144.33 =115.46

 Maximum shortage level is 115 units.