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Working capital management – Inventory control

Question 1

EOQ

A company requires 2,000 units of material A per month. The cost per order is
$250 and the holding costs of inventory are $1.33 per unit per year.

Investigate the total cost of buying the material in quantities of 2,000, 3,000 and
4,000 units at a time. Which is the cheapest option?

Use the EOQ formula to prove your answer is correct.

Ordering cost = D/Q × Co

Holding cost = Q/2 × Ch

For 2,000 units:

D = 2,000 × 12 = 24,000

Ordering cost = 24,000/2,000 × $250 = $3,000

Holding cost = 2,000/2 × $1.33 = $1,330

Total cost = $4,330

For 3,000 units:

Ordering cost = 24,000/3,000 × $250 = $2,000

Holding cost = 3,000/2 × $1.33 = $1,995

Total cost = $3,995

For 4,000 units:

Ordering cost = 24,000/4,000 × $250 = $1,500

Holding cost = 4,000/2 × $1.33 = $2,660

Total cost = $4,160

EOQ = √(2 × $250 × 24,000/$1.33) = 3,004 units

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