EOQ Problems — Questions and Step-by-Step Solutions

Instructions
Each problem is followed immediately by a step-by-step solution. Currency is denoted as Rs..

Problem 1. Basic EOQ Calculation

A retailer sells D = 12,000 units annually. Ordering cost S = Rs. 60 per order. Holding cost
H = Rs. 4 per unit per year.
Find the Economic Order Quantity (EOQ).
Solution 1. r
2DS
EOQ = Q∗ = .
H
Substitute numbers:

2DS = 2 × 12,000 × 60 = 24,000 × 60 = 1,440,000.

2DS 1,440,000
= = 360,000.
H 4
Q∗ = 360,000 = 600.
p

Q∗ = 600 units.

Problem 2. EOQ with Order Cycle

A company requires D = 9,600 units per year. Ordering cost S = Rs. 75. Holding cost H = Rs. 16
per unit per year. The firm operates 300 days per year.
Calculate: (a) EOQ, (b) number of orders per year, (c) time between orders (in days).
Solution 2. r r
∗ 2DS 2 × 9,600 × 75
Q = = .
H 16
Compute numerator:
2D = 19,200, 19,200 × 75 = 1,440,000.
Divide by H:
1,440,000
= 90,000.
16
Q∗ = 90,000 = 300.
p

Orders per year:

D 9,600
Orders/year = ∗
= = 32.
Q 300

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Time between orders (days):

Working days/year 300 75

Cycle time = = = = 9.375 days.
Orders/year 32 8

Q∗ = 300 units; 32 orders/year; cycle time = 9.375 days.

Problem 3. EOQ and Minimum Total Cost

A firm has annual demand D = 20,000 units. Ordering cost S = Rs. 50. Holding cost H = Rs. 5
per unit per year. Purchase cost per unit is Rs. 10 (note: purchase cost does not affect EOQ when
unit price is constant).
Determine: (a) EOQ, (b) minimum total annual inventory cost (excluding purchase cost).
Solution 3. Compute EOQ:
r r
∗ 2DS 2 × 20,000 × 50
Q = = .
H 5
Calculate:
2D = 40,000, 40,000 × 50 = 2,000,000.
2DS 2,000,000
= = 400,000.
H 5
Q∗ = 400,000 ≈ 632.4555 (units).
p

Minimum total annual inventory cost (ordering + holding) at Q∗ is

D Q∗
T Cmin = S + H.
Q∗ 2
√
A compact formula gives T Cmin = 2DSH. Compute:

2DSH = 2 × 20,000 × 50 × 5 = 10,000,000.

p
T Cmin = 10,000,000 ≈ 3,162.2777.
Q∗ ≈ 632.46 units; T Cmin ≈ Rs. 3,162.28.

Problem 4. EOQ for Multiple Orders

A company consumes D = 25,000 bolts per year. Cost per order S = Rs. 80. Annual holding cost
H = Rs. 8 per bolt per year.
Find: EOQ, number of orders per year, annual ordering cost and annual holding cost.
Solution 4. EOQ: r r
∗ 2DS 2 × 25,000 × 80
Q = = .
H 8
Compute:
2D = 50,000, 50,000 × 80 = 4,000,000.
2DS 4,000,000
= = 500,000.
H 8
Q∗ = 500,000 ≈ 707.1068 (units).
p

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Orders per year:
D 25,000
∗
= ≈ 35.3553 (orders).
Q 707.1068
Annual ordering cost:
D
Ordering cost = S ≈ 35.3553 × 80 ≈ Rs. 2,828.4271.
Q∗
Annual holding cost:
Q∗ 707.1068
Holding cost = H≈ × 8 ≈ 353.5534 × 8 ≈ Rs. 2,828.4271.
2 2
(As expected, ordering and holding costs are equal at EOQ.)

Q∗ ≈ 707.11 units; orders/year ≈ 35.36; Ordering cost ≈ Rs. 2,828.43; Holding cost ≈ Rs. 2,828.43.

Problem 5. EOQ and Reorder Point

Annual demand D = 14,400 units. Ordering cost S = Rs. 60. Holding cost H = Rs. 3 per unit
per year. Daily demand = 60 units. Lead time = 4 days.
Find: (a) EOQ, (b) Reorder point.
Solution 5. EOQ: r r
∗ 2DS 2 × 14,400 × 60
Q = = .
H 3
Compute:
2D = 28,800, 28,800 × 60 = 1,728,000.
2DS 1,728,000
= = 576,000.
H 3
Q∗ = 576,000 ≈ 758.9466 (units).
p

Reorder point (ROP) when demand during lead time is deterministic:

ROP = daily demand × lead time = 60 × 4 = 240 (units).

Q∗ ≈ 758.95 units; ROP = 240 units.

Problem 6. EOQ with Quantity Discount

Supplier price schedule:
Quantity range Price per unit (Rs.)
0–999 50
1000–2999 49
3000+ 48
Annual demand D = 6,000. Ordering cost S = Rs. 100. Holding cost is 20% of unit cost per year.
Find the order quantity that minimizes total annual cost.
Solution 6. Method: For each price tier compute the EOQ using that tier’s holding rate; if
the computed EOQ falls within that tier, evaluate total cost at that EOQ. For tiers where EOQ

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is not feasible, evaluate total cost at the smallest quantity that qualifies for the lower price (the
break quantity). Finally choose the Q with minimum total cost.
Let c = unit price and H = 0.20 c.
Tier 1: c = 50, H = 0.2 × 50 = 10.
r r r
∗ 2DS 2 × 6,000 × 100 1,200,000 p
Q1 = = = = 120,000 ≈ 346.4102.
H 10 10
This EOQ is within range 0–999, so feasible.
D Q
Total cost formula: T C = cD + S + H. Compute T C1 at Q = 346.4102:
Q 2
6,000 346.4102
T C1 ≈ 50 × 6,000 + × 100 + × 10.
346.4102 2
Numeric:
50 × 6,000 = 300,000.
6,000
≈ 17.3205, 17.3205 × 100 = 1,732.05.
346.4102
346.4102
= 173.2051, 173.2051 × 10 = 1,732.05.
2
T C1 ≈ 300,000 + 1,732.05 + 1,732.05 = 303,464.10.
Tier 2: c = 49, H = 0.2 × 49 = 9.8.
r
∗ 2 × 6,000 × 100
Q2 = ≈ 349.9271.
9.8
This is less than 1000, so not feasible for tier 2. Evaluate at the breakpoint Q = 1000 with c = 49:
6,000 1000
T C2, Q=1000 = 49 × 6,000 + × 100 + × 9.8.
1000 2
Compute:
49 × 6,000 = 294,000.
6,000
× 100 = 6 × 100 = 600.
1000
1000
× 9.8 = 500 × 9.8 = 4,900.
2
T C2, 1000 = 294,000 + 600 + 4,900 = 299,500.
Tier 3: c = 48, H = 0.2 × 48 = 9.6.
r
∗ 2 × 6,000 × 100
Q3 = ≈ 353.5534.
9.6
This is less than 3000, so not feasible. Evaluate at breakpoint Q = 3000 with c = 48:
6,000 3000
T C3, Q=3000 = 48 × 6,000 + × 100 + × 9.6.
3000 2
Compute:
48 × 6,000 = 288,000.

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 6,000
× 100 = 2 × 100 = 200.
3000
3000
× 9.6 = 1500 × 9.6 = 14,400.
2
T C3, 3000 = 288,000 + 200 + 14,400 = 302,600.
Compare the candidate total costs:

T C1 ≈ 303,464.10, T C2, 1000 = 299,500, T C3, 3000 = 302,600.

Minimum is T C2, 1000 = 299,500 (tier 2 at the break quantity Q = 1000).

Optimal order quantity Q = 1000 units (buy at Rs. 49/unit).

Problem 7. EOQ in a Production Environment (EPQ)

A factory produces D = 10,000 units per year. Production rate p = 50,000 units per year. Setup
cost S = Rs. 500 per production run. Carrying cost H = Rs. 2 per unit per year.
Find the Economic Production Quantity (EPQ).
Solution 7. EPQ (also called Production Order Quantity) formula:
s
2DS p
Q∗ = · .
H p−D

Substitute values:
p 50,000 50,000 5
= = = = 1.25.
p−D 50,000 − 10,000 40,000 4
2DS 2 × 10,000 × 500 10,000,000
= = = 5,000,000.
H 2 2
Q∗ = 5,000,000 × 1.25 = 6,250,000 = 2,500.
p p

Q∗ = 2,500 units (EPQ).

Problem 8. EOQ under Shortages Allowed

Annual demand D = 15,000. Ordering cost S = Rs. 80. Holding cost H = Rs. 5 per unit per year.
Shortage (backorder) cost π = Rs. 20 per unit per year.
Find: (a) EOQ with shortages allowed, (b) maximum shortage level.
Solution 8. For the model allowing backorders, the optimal order quantity and maximum
shortage are: r
2DS( H + π ) H
Q∗ = , S ∗ = Q∗ · .
Hπ H +π
Compute numeric values.
First compute the factor:

2DS = 2 × 15,000 × 80 = 30,000 × 80 = 2,400,000.

H + π = 5 + 20 = 25, Hπ = 5 × 20 = 100.
2DS(H + π) 2,400,000 × 25 60,000,000
= = = 600,000.
Hπ 100 100

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 Q∗ =
p
600,000 ≈ 774.5967 (units).
Maximum shortage:
H 5
S ∗ = Q∗ · = 774.5967 × = 774.5967 × 0.2 ≈ 154.9193 (units).
H +π 25

Q∗ ≈ 774.60 units; maximum shortage S ∗ ≈ 154.92 units.

End of problems.