# Economic Order Quantity (EOQ): Practical Problems and Solutions ### Reviewed by Editorial Team

Updated on March 03, 2023

## Problem 1

The John Equipment Company estimates its carrying cost at 15% and its ordering cost at \$9 per order. The estimated annual requirement is 48,000 units at a price of \$4 per unit.

Required:

• What is the most economical number of units to order?
• How many orders should be placed in a year?
• How often should an order be placed?

### Solution

1. What is the most economical number of units to order?

Annual requirement = 48,000 units

Ordering cost = \$9 per order

Carrying cost = 15% of per-unit cost

Per unit cost = \$4 per unit

2. How many orders should be placed in a year?

= Annual requirement / EOQ

= 48,000 units / 1,200 units

= 40 orders

3. How often should an order be placed?

Frequency of orders = No. of days in one year / No. of orders

= 360 days / 40 orders

= 9 days

## Problem 2

To date, Raymond Bro. has been purchasing an item in lots of 900 units. This equates to a three-month supply. The cost per unit is \$12, the order cost is \$16 per order, and the carrying cost is 25%.

Required: How much can Raymond Bro. save per year by purchasing the item in the most economical quantities?

### Solution

The first stage in our working is to compute the annual requirement.

Given that 900 units amounts to a three-month supply, the monthly requirement is 900 units / 3 months = 300 units.

Therefore, the annual requirement is 300 units x 12 months = 3,600 units.

In turn, the EOQ can be computed as follows:

No. of Orders = 3,600 units / 900 units

= 4 orders

= 3,600 units / 196 units

= 18 orders approx.

Ordering Cost = 4 orders x \$16 per order

= \$64

Also, in the case of EOQ:

= 18 orders x \$16 per order

= \$288

Average Inventory = 900 units / 2

= 450 units

In the case of EOQ:

= 196 units / 2

= 98 units

Carrying cost = \$3 x 450 units

= \$1,350

In the case of EOQ:

= \$3 x 98 units

= \$294

Total cost = \$64 + \$1,350

\$1,414

In the case of EOQ:

=\$288 + \$294

= \$582

Saving = \$1,414 - \$582

= \$832

## Problem 3

A manufacturing company places a semi-annual order of 24,000 units at a price of \$20 per unit. Its carrying cost is 15% and the order cost is \$12 per order.

Required:

• What is the most economical order quantity?
• How many orders need to be placed?

### Solution

No. of orders per year = Annual Requirement / EOQ

= 48,000 units / 620 units

= 77 orders approximately

To compute the annual requirement:

24,000 units are ordered semiannually, therefore:

Annual requirement = 24,000 units x 2 = 48,000 units.

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