A manufacturer by certain equipment from outside suppliers at rupees 3...
To determine the Economic Order Quantity (EOQ), we can use the EOQ formula, which minimizes the total inventory costs. The formula is given by:
EOQ = √((2DS) / H)
Where:
- D = Annual demand (units)
- S = Cost per order
- H = Holding cost per unit per year
Given data:
- Annual demand (D) = 800 units
- Cost per order (S) = Rs 100
- Cost per unit = Rs 30
- Annual return on investment = 10%
- Rent, insurance, taxes per unit per year = Rs 1
Step 1: Calculate Holding Cost (H)
Holding cost (H) includes the cost of capital and other holding costs:
- Cost of capital per unit = 10% of Rs 30 = Rs 3
- Total holding cost (H) = Rs 3 + Rs 1 = Rs 4
Step 2: Substitute values into the EOQ formula
Now, substitute D, S, and H into the EOQ formula:
EOQ = √((2 * 800 * 100) / 4)
EOQ = √((160000) / 4)
EOQ = √40000
EOQ = 200 units
Conclusion
The Economic Order Quantity (EOQ) for the manufacturer is 200 units. This quantity minimizes the total inventory costs, balancing ordering and holding costs effectively. By ordering 200 units each time, the manufacturer can optimize their inventory management and reduce excess costs.