Total inventory management cost = ordering costs + inventory carrying costs.

Ordering cost (communications, inbound logistics costs etc.,) increases with the number of orders.
For a fixed demand quantity in a year, if we want to decrease the inventory carrying cost then we
can order in small quantities, but the number of orders will rise and the ordering cost will increase.
Vice versa is also true. So, we have to find the balance between ordering costs and carrying cost to
minimize the Total cost. This is done by finding the optimal order quantity- EOQ

Data given
Carrying cost = 40% of price= 0.4*50= 20

Cost per unit, Cp = 50

Number of units expected to be sold or Annual demand expected, D =6000
Order placing cost PER ORDER, Co = 235
Carrying cost per unit per year, Cc == 40% of price= 0.4*50= 20

a).

Economic order quantity is the number of units that must be ordered every time in a year so that the
total inventory management cost is minimal.

Eoq = =
2 D Cp/Cc 2 6000 50/20

= 375.499667

b)
Total Inventory management cost = Yearly Ordering costs+ Yearly Carrying costs
= (Total Number of orders per year * ordering costs per order, Co ) + (Avg. Inventory being carried at
any point * Carrying cost per unit per year )

Total number of orders per year = Annual demand, D / Order quantity ,Q

=6000 / 375.499667 = 15.97870924 =16

Avg inventory carried = (Beginning inventory + Ending inventory)/2

Let the order Q, be place at the beginning of every order cycle. Hence the inventory arrives only at
the beginning of cycle. At the end of the cycle, the inventory becomes zero

Avg inventory= (375.499667 + 0)/2 = 187.7498336

Total Inventory management cost = (16*235) + (187.7498336 *20)

=6007.994674 + 3754.996671

=3754.996671

c . 2% discount if the order quantity is above 1200. Hence , Cp = 50 * 0.98= 49

=6069 6069
Inventory costs 3794

Order placing cost PER ORDER, Co = 0.4*49=19.6

order quantity , Q = =
2 D Cp/Cc 2 6000 50/19.6

= 15.8181151 =16

Purchase cost or ordering cost = Total Number of orders per year * ordering costs per order, Co

=Annual demand/ order quantity * ordering costs per order, Co

= 6000/16* 19.6

=6068.99111

Increase in purchase cost =6068.99111 -6007.99467 =61.0053262

Total inventory cost = 9862.111,

Inventory costs have increased by =9862.111 -9762.991 =99.12

D)

The firm should not select this offer as the purchase costs have increased
Ordering cost (communications, inbound logistics costs etc.,) increases with the number of orders.
For a fixed demand quantity in a year, if we want to decrease the inventory carrying cost then we
can order in small quantities, but the number of orders will rise and the ordering cost will increase.
Vice versa is also true. So, we have to find the balance between ordering costs and carrying cost to
minimize the Total cost. This is done by finding the optimal order quantity- EOQ

Data given
Carrying cost = 40% of price= 0.4*50= 20

Cost per unit, Cp = 50

Number of units expected to be sold or Annual demand expected, D =6000
Order placing cost PER ORDER, Co = 15
Carrying cost per unit per year, Cc == 40% of price= 0.4*50= 20

a).

Economic order quantity is the number of units that must be ordered every time in a year so that the
total inventory management cost is minimal.

Eoq = =
2 D Cp/Cc 2 6000 50/20

= 375.499667