ne _ MATERIAL, fran Hicabuve diagrani, Tein elene INAL BATE Cue Hid yay, appanite waves HE huge saianbily fe ordered ab ane ne, dering ipl paveying conta: will he high andl idee Cerne I MOM quietly 1 or erag, yi © Assumptions In the Calculation of F,0, 1. Share ave dynamic eondiliona of apply Wht enable a Sen 4 arden aa Hynes “ 2. Prices af the hens remain alable whieh leap ary ing cot conibiagy, A. Phe quantity af the item bo he consumed daring, a part " Janowi ey, quantiiy Ho be consunned da eertidy ILLUSTRATION 6, Hind ub ble economic ordering quantily U6 ¢ following particular and also show 4 qonph Wenhitying econonie ordering guy) lt ‘Annual venge 000 nnilas; Conk of unstarkal por uni 220 5 Cost ap yet receiving one orien © 40; Annual enreying east of one anil: 10% oF inventing, SOLUTION - The farmula for the ealoulation of eeonemia ordering quanttly ts: AONOEP TS: OLABHPICATION Apyy 1, any wey, bp D ibis yg AA wig AN tan gil In Wing 4, jewhar AE VsHiug 5 Ny POO roa. where = Annual usage ol material /,, 6,000 unite O= Gost of placing one order Le, ® 60 T= Annual carrying cast of one unit 4e, 10% off 206 ED ay /2 = 6.000 ats «0 £0.02 ye aut V/,00,000 = G00 unite.[11-12 aL : a» omic ordering quantity is applicable op), 209 of econ ut if nits is given. Bi mnie ordering quantity will rerain yp ul The formula if the consumption of that *, of raw material in u 2CO of econo a1 however, the meaning of signs will differ as C = Annual requirement of material i © = Cost of placing one order. | = % Carrying Cost. . ILLUSTRATION 9. Find out the economic lowi articulars : : i ai usage : = 1, 20,000. Cost of placing # carrying cost : 10% of inventory value. eo ead for the calculation of the economic ordering quantity is = 260 £.0.0.-YT irement of material in ru g one order /.e., © 60. ie., 10%. consumption i la in value, the formul sjven belOW : ordering quantity (E.0.9 2) fr nd receiving one order - > ¢, 2 ey Aan, c= Annual requi pees /.e., = 1,20,000. Cost of placin: 1= 10% Carrying Cost where £.0.0.= 10 3% = Bae 1200000 x F 60% 100 = V@14.40,00,000 = = 12,000 ILLUSTRATION 10. Following information relating to @ type of mq available : ‘Annual Demand 2,400 units Storage cost _ z 240 Interest rate a pe Unit Price Ordering cost per order Calculate Economic Order Quantit; z 4.00 Lead time Hale y and total number of orders to be placed 4 the year. SOLUTION EooHeN [22 [2x 2400 x84 _ 72-40 x 12% 252 units 125 Total No. of Orders = — Annual Consumption _ _ 2,400 units ae = Economic Order Quantity ~ 258 units ~ 9.3 oF 10 orders. USTRATION 11. F ing i i i available: ‘ollowing information relating to a type of materi Annual Demand 2,400 units; Unit Pri Le y nits; Unit Price 7 2.40; Ordering cos’ rage cost 2% per annum; Interest rate 10% per annum; Lead ties lela Calcul: i culate E.0.Q. and total inventory cost in respect of the above raw materialFED 4 [2228008 : g0.0-=ViI F240x12% = | \ 125 Calculation of Total inventory Cost e of 2,400 units @ Z 2.40 per uni ¥ purchase pric ° er unit 5,769.00 jaa coring cost @ x 258 Unis x F 2.40 x 1204) “F240 ws 258 units have been multiplied by 2 because carrying cost eet age inventory In stores Is 0 bo taken} aos ‘aaa: ordering cost of 10 orders @ F 4 per order oe = Annual Demand _ 2,400 units [ No, ot orders = “E.G. S58 unis = 89 orders or 10 orers (sy) | Total Inventory Cost : 5227-18. 7 Carrying cost is to be calculated on aver: roduction departments as per their r Et different times. That is why it is pert rage inventory. Inventory in stores is to be issued to the requirements. So inventory held in stores keeps changing tinent to calculate carrying cost on average invertory. ILLUSTRATION 12. A manufacturing company used 7 50,000 materials per year. The administration cost per purchase is € 50, and the carrying cost is 20% of the average inventory. The company currently has an optimum purchasing policy but has been offered a 0.4 per cent discount if they purchase five times per year. Should the offer be Sccepted ? Ifnot, what counter offer should be made ? SOLUTION ‘An optimum purchasing policy is to give a purchase order for £.0.0. 4/260 4/22 50000 x% 50 EOS T 20% Nott 2 x & 50,000 x = 50 x 100 = 20 -V® 2,50,00,000 = 7 5,000 Evaluation of the Discount Proposal Cost if the order is for Cost if purchases are £.0.0. 1.0, © 5,000 made five times a year = Material cost 50,000 49,800 (i.e. 50,000 — 4% of 50,000) Ordering cost (10 orders of € 5,000 each) 500 (Le. 10 orders @ = 50) 250 (ie. 5 orders @ 7 50) 1 250,000 | 20 . Carrying cost 500 (10.3 x£52000,29:) — 996 (1, 51,000 51,046 For getting a discount of 200, rate of discount is 0.4%. Therefore, for getting a further discount of ¥ 46, further rate of discount should be 0.1% ( he: Phen z46) Thus the rate of discount should be more than 0.5% to make the offer attractive.MATERIALS—CONCEPTS, ELASSIFICATION avy ILLUSTRATION 13. Annual demand for a particular jy, units, Inventory carrying cost per unit per year is 20% ang tiny order. The price quoted by the supplier is ¢ 4 per unit However Tdering give discount of 5% for orders of 1,500 units or more. tx it wore ppl AS discount offer ? inet in 8 SOLUTION Without Discount 4 ae 20% of & 4 = 70.80 Carrying cost per unit per Order cost per order 7 40 Ordering Quantity per order (Ordering quantity under without discount | / 2.x 10,000 x = 40 price will be Economic Order Quantity because it will give the lowest cost) = 1.000 units Purchase cost for annual requirement of 40,000 38,000 10,000 units (10,000 units @ 4) (10,000 units @ » 5 Ordering Cost 400 a0 (For 10 orders @ ¢ 40) (For 7 orders @ 2 4p Carrying cost tor average inventory, i.e., 570 ‘carrying cost for half of ordering quantity 1900 2 *t076 Total Cost Saving on Discount Otter ¥ 40,800—% 38,850 Stim (iv Hence, discount offer of 5% should be availed and ordering quantity should be 1,500 units. ILLUSTRATION 14. Anil company buys its annual requirement of 36,000 unite. 6 instalments. Each unit costs 1 and the ordering cost is @ 25. The inventory carr cost is estimated at 20% of unit value. Find the total annual cost of the existing invera, policy. How much money can be saved by Economic Order Quantity ? 3 SOLUTION Calculation of the Annual Cost of. Existing Inventory Policy , x Ordering cost for 6 orders @ % 25 per order 1 Carrying Cost @ 20% (ie, 8200. 1.3, 20.) ee Annual cost (in case of existing inventory policy) 750 Calculation of Economie Order Quantity 4/262_ 4 [2 x 36,000 units x % 25 T= 20% of Ft = 3,000 units Total number of orders to be placed to meet annual requirement of 36,000 units = £.0.Q, 6,000 units _ 4» 3,000 units = '*