HARISH PATEL(JDG & SAS) 1

NAVNIRMAN INSTITUTE OF MANAGEMENT

PRODUCTION MANAGEMENT

NUMERICAL PROBLEMS

BASIC EOQ PROBLEM:

EOQ = 2*D*Cp/Ch

TC = P*D + D/Q *Cp + Q/2* Ch.

Where P= Price, D= Demand,Q= Quantity,
Cp= Ordering cost, Ch= inventory carrying
cost.

Que.1. Annual demand of one material is 90000 pcs. Price of this material is
Rs.160 per pc. Cost of placing one order is Rs.1250. per unit annual inventory
carrying cost is 10% of price.

1. Economic Order quantity.(EOQ).

2. Observe that when order quantity is equal to EOQ, Total annual ordering
cost is equal to total annual carrying cost.

(Ans. EOQ=3750 Pieces/order, Total ordering cost=30000/-,Total

carrying cost=30000/- Total cost = 14460000)

Que.2. From the following details calculate EOQ, Number of orders to be placed in
one year and total cost.

● Total annual consumption = 10000 kgs.

● Cost of carrying inventory=10% of price.
● Ordering cost = Rs. 8 per order
 2 H
ARISH PATEL(JDG & SAS)

● Cost price per unit of material= Rs.0.40

(Ans. EOQ = 2000kg, No of order=5 times, total cost= 4080/-) EOQ

WITH PRICE DISCOUNT:

Que.3. Daily requirement of one chemical is 150 Liters. The factory works for 300
days in one year. Ordering cost is Rs. 2500 per order. Price of one barrel of this
chemical is Rs.18000. One barrel contains 200 liters of chemical. Inventory
carrying cost is 10% of price on annual basis. Find out…..

a. Find out economic order quantity.

b. Find out total cost.
c. If supplier offers discount of 10% if 10000 or more litres of chemical is
ordered, should you accept discount offer?

(Ans. EOQ = 5000 liters, TC=4095000 , TC1 =3696750 )

Que.4. Annual demand of a company is 5000 units. Price of this product is Rs. 20
per unit. Ordering cost is Rs. 16 per order. Storage cost is 2% per piece per year
and interest cost is 12% per annum. Find out EOQ, Total cost and number of
orders to be placed.

Que.5. A hospital uses 200 trays per month. The price of one tray is Rs.8. The
ordering cost is Rs. 48 per order. The carrying cost is 18% of the cost price.

a. Find out EOQ.

b. If supplier offers 5% discount on the order quantity of 800 trays. Should we
accept the discount?
c. If the supplier offers 10% discount on the order quantity of 1600 trays.
Should we accept the discount?
 3 H
ARISH PATEL(JDG & SAS)

(Ans. . EOQ= 400 trays, TC= 19,776., TC1=18931.2, TC2=18392.)

[Link] demand of one chemical is 100000 kg. Unit price of that chemical is
Rs. 144 per kg. Since this chemical is a cold storage item, inventory carrying cost
is very high and It is 36% of price on annual basis. Cost of sending inquiries and
asking for quotations from various suppliers is Rs.300. Cost of preparing
comparison of quotation is Rs.100. Cost of negotiation session is Rs.1200. Cost of
typing and sending order is Rs.250/order. Out of every order 2kg of material is
used in quality check and cost of quality check is Rs. 700/test. This quality test is
done by a destructive testing method and hence 2kg taken from quality checking
do not remain useful after testing. Find out Economic order quantity.

The supplier offers 5% discount if order quantity is more than or equal to

20000 kg. It offers 8% discount if order quantity is more than or equal to 40000 kg.
Should the discount offers be accepted?

(Ans. EOQ= 3309Kg, TC=1,45,71,535/-, TC1= 1,41,86,618/-,

TC2=14202503.74)

Que.7. Demand of one material is 6400kg/week. The factory works for 50 weeks
in 1 year. Price of this material is Rs.100 per kg. Per unit annual inventory carrying
cost is 25% of price. Cost of sending inquiry is Rs.100, cost of making comparison
is Rs.200, cost of arranging one negotiation session is Rs.500, cost of typing and
sending purchase order is Rs.100. Out of every order received, samples of 10kg are
taken and this material do not remain useful after test. Cost of quality test is Rs.600
per test. Find out EOQ. If supplier offers a 5% discount for order quantity of
50000kg, should the discount offer be accepted?
 4 H
ARISH PATEL(JDG & SAS)

EOQ MODEL WITH SEPARATE TREATMENT TO INTEREST COST

AND STORAGE COST.

Why interest cost and storage cost is considered separately?

In basic EOQ model, while counting inventory carrying cost we do not

differentiate between storage cost and interest cost separately. While deriving EOQ
formula we combine interest cost and storage cost and it is called inventory
carrying cost. At that time we perceived that inventory carrying cost is related to
stock level and if stock was going to reduce from maximum level equal to Q to
minimum level equal to zero, we should count carrying cost on average inventory
level which is Q/2)

This consideration is proper as far as interest cost is concerned. Interest cost

is an opportunity cost on money blocked in inventory. I f stock is lesser, money
blocked in inventory will be of lesser amount. Thus, it is proper that interest cost is
counted on average stock level and not on maximum or minimum level of stock.

This consideration can not be applied to storage cost because, warehouse capacity
is created to accommodate maximum stock level. If this is lesser than the
maximum level, most ware housing expenses will not reduce with reduction in
inventory. For example – there can not be any reduction in depreciation and rent,
salary of warehouse employees, insurance cost etc.

In other words, warehousing expenses are more or less fixed expenses which are
incurred keeping in mind maximum stock level equal to Q. We should therefore
link warehouse expenses to maximum stock level and not to average stock level.

EOQ = 2*D*Cp/Ci
+Ch)
 5 H
ARISH PATEL(JDG & SAS)

TC = P*D + D/Q *Cp + Q/2* Ch + Cs*Q

Where P= Price, D= Demand,Q= Quantity, Cp=

Ordering cost, Ch= inventory carrying [Link]= Cost
of
interest, Cst= Cost of storage.

Que.8. Annual demand of a company is 5000 units. Price of this product is Rs. 20
per unit. Ordering cost is Rs. 16 per order. Storage cost is 2% per piece per year
and interest cost is 12% per annum. Find out EOQ, Total cost and number of
orders to be placed.

Que.9. Annual demand of a firm is 36000 units and cost per unit is Rs.1 . Ordering
cost is Rs.25 per orders. Storage cost is 5% of the price on annual basis. Cost of
capital is 15%. Find out EOQ, Total cost and number of orders to be placed.

If the supplier offers discount of 5% if order quantity is 2700 units. Should

we accept the discount offer?

Que.10. Demand of one material is 1000 pieces per week. Price of this material is
Rs.2400 per box of dozen pieces. Ordering cost is Rs. 1600 per order. Interest cost
is 10% of price on annual basis. Storage cost is Rs. 10/piece/year. Find EOQ and
Total cost.

(Ans. . EOQ=2040 pieces, TC=

Que.11. Annual requirement of one chemical is 25000 liters. Ordering cost is

Rs.1800 per order. Unit price of material is Rs. 100/liter. Company’s cost of capital
is 10% per annum. Storage cost is Rs. 3/ liter. Find EOQ.
 6 H
ARISH PATEL(JDG & SAS)

If the supplier offers a discount of 8% if order quantity is more than or equal

to 5000 liters and 10% discount is given if order quantity is more than or equal to
10000 liters. Should the discount offer be accepted?

(Ans. . EOQ=2372 liters, TC= 25,37,947/-, TC1=23,47,000/-)

Que.12 Annual demand of one material is 60000 kg. Cost of placing one order is
Rs.1800 per order. Price of this material is Rs.100 per kg. Prevailing interest cost is
6% per unit per year. Storage cost of this material is Rs. 7/kg/year. Find out EOQ.

If the supplier offers price of Rs. 96 per kg if order quantity is more than or
equal to 15000kg. He further offers price of Rs.95 if order quantity is more than or
equal to 20000kg. Should we accept any of the discount offer?

(Ans. . EOQ=3286 kg, TC=60,65,726/-, TC1=59,15,400/-,TC2=59,02,400/-)

[Link] demand of one material is 1000 units. Price of this material is Rs.
80 per unit. Cost of placing one order is Rs. 1600 per order. Prevailing interest rate
is 9% per year. Storage cost is Rs.2 per unit per year, Find EOQ, If supplier offers
price of Rs. 78 per unit for order discount of 13000 units and price of Rs,. 76 for
order quantity of 26000 units, should any of the discount offer be accepted?

(Ans. . EOQ=3854 units, TC= 42,03,170.36/-,TC1=41,34,030/-, TC2=40,96,120)

ECONOMIC ORDER QUANTITY WITH EXPOSURE TO SHORTAGE

COST:

EOQ = 2*D(Cp +nCe)/Ch

P*D + D/Q *Cp + Q/2* Ch + (n*Ce*D/Q)
TC =
Where n= no of orders delayed/ total
orders.
 HARISH PATEL(JDG & SAS) 7

P= Price, D= Demand,Q= Quantity, Cp= Ordering cost,

Ch= inventory carrying [Link]= Cost of interest, Ce=
Shortage cost.

Que.14. Weekly requirement of one material is 2000kg. The factory works for 45
weeks in one year. Cost of placing one order is Rs.1800. Price of this material is
Rs.180/kg. Inventory carrying cost is 20% of price on annual basis. If any of the
order is delayed, company is exposed to shortage cost of Rs.6000/order delay.
From the past records it is observed that in last 3 years out of total 60 orders, on 51
occasions the supplier supplied the goods on time. Find out EOQ. If the supplier
offer a discount of 6% if order quantity is more than or equal to 18000kg and
discount of 8% if order quantity is more than or equal to 27000kg, should the
discount offer be accepted?

(Ans. . EOQ=3674kg, TC=1,63,32,273/-, TC1=1,55,46,060/-,TC2=1,53,60,120/-)

Que.15. Annual demand of one material is 20000kgs. Cost of placing one order is
Rs.400. As per purchasing records , in last 3 years, out of total 60 orders placed for
this material and on 54 occasions, material was received on time. Whenever any
order gets delayed, company experiences shortage cost of Rs.5000 per delay. Price
of this material is Rs.160/kg. Per unit annual inventory carrying cost is 10% of
price. Find out EOQ.

If supplier offers price of Rs.156/kg, if order quantity is more than or equal

to 10000kgs, the probability of getting delay is 4% in this case, should we accept
discount offer?

(Ans. . EOQ=5,797/-,TC= 96,92,745/-)

 8 H
ARISH PATEL(JDG & SAS)

Que.16. Annual demand of one material is 20000 kgs, cost of placing one order is
Rs.400/-. As per purchasing records ,in last 3 years, out of total 60 orders placed
for this material and on 54 occasions, material was received on time. Whenever
any order gets delayed, company experiences shortage cost of Rs. 5000 per delay.
Price of this material is Rs. 160/-. Per unit. Annual inventory carrying cost is 10%
of price. Find out EOQ.

If supplier offers price of Rs. 156/- if order quantity is more than or equal to
10,000 pieces, the probability of getting delay is 4% in this case, should we accept
discount offer?

(Ans. EOQ= 1500kgs, TC=32,24,000/-, TC1= 31,99,200/-)

Que.17 .A company requires special type of raw material on regular basis.

Therefore they decided to manufacture it on in house basis. Annual demand of this
material is 20,000 pieces. Factory works for 320 days in a year. The production
capacity is 150 pieces per day. Machine set up cost is |Rs.800. Carrying cost is
Rs.80 per piece. Find out..

● ERLQ
● Number of production runs required in one year.
● Length of one production run in days.
● Maximum level of inventory.

[Link] Company requires 1 type of valve as input material on regular basis.

They have decided to make this valve on in house basis. The annual demand is
10000 pieces and factory works for 250 valves per day. Machine set up cost is Rs.
550 per set up. Carrying cost is Rs. 40 per piece. Find out the following:
 9 H
ARISH PATEL(JDG & SAS)

a. ERLQ
b. Number of production runs required in one year.
c. Length of one production run.
d. Maximum level of stock if safety stock is 400 pieces.

(Ans. ERLQ=642 Pieces, No of prod. Run=10 times, Length of one prod.

run= 5 days, Maximum level of stock= 1042 pieces. )

[Link] demand of one chemical is 40000kg. The factory works for 50

weeks in one year. Ordering cost is Rs.800/order. Price of the chemical is
Rs.10/kg. Inventory carrying cost is 10% of price on annual basis.

Company has decided to keep safety stock of 10% of EOQ. Company’s lead
time of purchasing is 2 weeks. Find out safety stock level, Re-order level,
Maximum level, Minimum level and total annual cost of manufacturing.

(Ans. . EOQ=8000 Kg, safety stock=800kg, ROL= 240019Kg, Max level=

880019 kg, Minimum level=800 kg, TC=4,08,800/-)

Que.20. Annual demand of a material is 20000 pieces. This material is

manufactured on in house basis. The factory runs for 50 weeks in one year. Weekly
capacity of manufacturing is 800 pieces. Every time when production starts Rs.
500 is spent on machine tuning, Rs.100 on giving instructions to the workers,
Rs.200 on creating records for new production. Inventory carrying cost is Rs. 16
per year per unit. Find out…

a. ERLQ
b. Number of production runs required in one year.
c. Length of one production runs.
 10 H
ARISH PATEL(JDG & SAS)

(Ans. ERLQ= 2000 Pieces, No of prod. Run= 10 times, Length of prod run = 2.5
weeks)

Que.21. On the basis of following data find out….

a. EOQ
b. Safety stock.
c. Minimum level
d. Maximum level.
e. Re order level.

D=24000 Units/year.

There are 320 working days one year.

P=1.25 Rs. Per year.

Cp= Rs.25/order.

Ch= 6% of price.

Lead time=10days.

Safety stock=6 days.

(Ans. . EOQ=4000 units, safety stock= 450 units, Min level=450 units, max
level=4450 units, ROL=1200 units)

Que.22. A factory uses 50000 units of raw material annually. Price of the raw
material is Rs. 1.50 per unit. Cost of placing an order is Rs.50 per order and
inventory carrying cost is 5% per year. Find out EOQ. If factory works for 320
days in a year, lead time is 10 days, safety stock should be 6 days consumption.
Find out safety
 11 H
ARISH PATEL(JDG & SAS)

stock, minimum level of inventory, maximum level of inventory and reordering

level of inventory.

Que.23. Daily requirement of one chemical is 300 Kgs. There are 300 working
days in one year. Since this material is one of the critical inputs, it is manufactured
on in house basis. In house manufacturing capacity for this material is 600 kgs per
day. Every time when a new production cycle starts Rs.500 is spent on generation
of new records, Rs. 600 on giving instructions to the workers, Rs.2900 on cleaning
and resetting machines. Per unit cost of this material is Rs.100 per kg. Inventory
carrying cost is 10% of the cost of manufacturing on annual basis. Find out..

a. ERLQ.
b. Maximum level of inventory.
c. Number of production runs needed in one year.

(Ans. ERLQ= 12000 Kg, Max level of inventory=6000 kg, No of prod. run=8
times)