fixed annual fee 1,000.

00
variable charge 5.00 per day

Delivery charges per day 10,000.00

A. Calculate the current annual total inventory costs

Daily demand 500.00 Units

Annual demand 180,000.00 Units
Ordering Cost 5.00
Carrying Cost 3.00

EOQ = Q 774.60 Units *always represent units

Economic Order Quality = √2xCxD

H
C = Cost of placing one order
D = the annual demand
H = annual cost of holding one unit of inventory

cartons every month 20.00

carton costs 2,000.00
Delivery Charges 10,000.00 per delivery
Import duties per carton 300.00 per carton
Custom fees per order 200.00 per order
Import license fee per annum 150.00 per annum

Calculate the current annual total inventory costs

Calculate the economic order quantity
Calculate annual total inventory costs if EOQ is used

Purchase Cost
Annual Demand = 57,600.00
Purchase Cost = 480,000.00
Order Cost
Delivery Cost = 12.00 Number of Deliveries
=12 x 10,000
Delivery Cost = 120,000.00
Import Cost =
Import Fee = =300 x 240 cartons
Import Cost = 72,000.00
Custom Cost 2,400.00

Holding Cost
Maximum number of carton s 20.00
Average number of cartons 10.00
Variables Charge 18,250.00
Fixed Charge 1,000.00
Cold Storage 19,250.00

Electricity 10,000.00

Total Inventory Cost 703,650.00

Economic Order Quantity

EOQ = √

√(2 � 10,200 (�1)� 240 (�2))/(1,825 (𝑊3))

Costs
Purchase Cost
Order Cost
   Delivery Cost

   Import Cost
   Custom Cost
Holding Cost
   Cold storage

   Electricity (as before)

Total Inventory Cost (using EOQ)

Using EOQ Model will save Jason $42,200 (703,650 - 661,450) annually.
 Working $
As before 480,000

Annual Demand = 240 cartons 50,000

Number of deliveries = 240/52 ≈ 5

Delivery Cost = 5 x $10,000 = $50,000

As before 72,000
Custom fee = $200 x 5 orders = $1000 1,000

Maximum number of cartons stored = 52 19,250

Average number of cartons = 52 ÷ 2 = 26

Variable charge = 26 x $5 x 365 = $47,450

Fixed charge (as before) = $1,000

Total = $48,450
10,000

661,450
Economic order quantity (EOQ) is the order quantity of inventory that minimizes the total cost of inventory management.
Two most important categories of inventory costs are ordering costs and carrying costs. Ordering costs are costs that are in
Ordering costs and carrying costs are quite opposite to each other. If we need to minimize carrying costs we have to place
We need to minimize the total inventory costs and EOQ model helps us just do that.
Total inventory costs = Ordering costs + Holding costs
By taking the first derivative of the function we find the following equation for minimum cost
EOQ = SQRT(2 × Quantity × Cost Per Order / Carrying Cost Per Order)
Example
ABC Ltd. is engaged in sale of footballs. Its cost per order is $400 and its carrying cost unit is $10 per unit per annum. The
Solution
EOQ = SQRT(2 × 20,000 × 400/10) = 1,265 units
Annual demand is 20,000 units so the company will have to place 16 orders (= annual demand of 20,000 divided by order s
Average inventory held is 632.5 ((0+1,265)/2) which means total carrying costs of $6,325 (i.e. 632.5 × $10).
tory management.
are costs that are incurred on obtaining additional inventories. They include costs incurred on communicating the order, transportation
sts we have to place small order which increases the ordering costs. If we want minimize our ordering costs we have to place few order

unit per annum. The company has a demand for 20,000 units per year. Calculate the order size, total orders required during a year, tot

00 divided by order size of 1,265). Total ordering cost is hence $64,000 ($400 multiplied by 16).
cating the order, transportation cost, etc. Carrying costs represent the costs incurred on holding inventory in hand. They include the op
osts we have to place few orders in a year and this requires placing large orders which in turn increases the total carrying costs for the

ders required during a year, total carrying cost and total ordering cost for the year.
ory in hand. They include the opportunity cost of money held up in inventories, storage costs, spoilage costs, etc.
the total carrying costs for the period.