Khalideoq

As the production manager, you need to minimize both ordering and inventory costs. You need to provide a recommendation of the optimal order quantity of raw materials to your plant manager. Your objective is to determine the economic order quantity (EOQ). If the annual demand for Ultamyacin at Smitheford is 400,000 units, then the annual carrying cost rate is 15% of the cost of the unit. The product costs $48/unit to purchase, and the product ordering cost is $28.00".
Given:
Demand or Annual inventory requirement = 400,000 units
Ordering cost = $28
Production cost per unit = $48
Carrying cost = 15% of the cost of the unit = 15% of $48
= .15* $48 = $7.20
The basic EOQ:
EOQ = ? (2SO/C)
Where EOQ = economic order quantity
S = annual inventory requirement
O = cost per order transaction (ordering cost)
C = carrying cost per unit
EOQ = ? [(2) (400,000) ($28)/$7.20]
= ? 3111,111.11
EOQ = 1,763.83 or 1764 units
TC (total cost) at the EOQ
Total cost (annual) = ordering cost + carrying (holding cost) (Render et al, 2003).
Annual Ordering cost:
= (Annual demand/ number of units in each order) (ordering cost per order)
= (400,000/1764) ($28)
= $6349.21
Annual carrying cost:
= (Average inventory) (carrying cost per unit per year)
Average inventory:
= EOQ/2 = 1764/2
= 882
Annual carrying cost = (882) ($7.20) = $6350.40
Total cost at EOQ = $6349.21 + $6350.40 = $12,699.61
TC increase if the order quantity would be 1,000 units:
Annual ordering cost = (400,000/1000) ($28)
= $ 11,200
Annual carrying cost:
= (Average inventory) (carrying cost per unit per year)
Average inventory:
= EOQ/2 = 1000/2
= 500
Annual carrying cost = (500) ($7.20) = $ 3,600
Total cost at EOQ (1000) = $11,200 + $3,600= $ 14,800
Total Cost increase if the order quantity would be 1,000 units:
($14,800 - $12,699.61) = $2,100.39
JIT (just-in-time) ordering methodology VS EOQ methodology
While the EOQ method determines the level of inventory that must be ordered in order to minimize the cost of ordering and cost

References: Render, Barry et al. (2003). Quantitative Analysis for Management. Pearson Education (Asia) Pte. Ltd. http://www.investopedia.com/terms/i/inventory-management.asp#axzz1sxxT5I00 http://www.accountingformanagement.com/just_in_time.htm). http://www.thefreedictionary.com/systems+design http://searchenterprisewan.techtarget.com/definition/capacity-planning http://www.mastercontrol.com/quality-management-software/quality-control/definition.html http://rockfordconsulting.com/supply-chain-management.htm http://www.businessdictionary.com/definition/project-management.html