A manufacturing company purchases 9000 parts of a machine for its annual requirements ordering for month usage at a time, each part costing Rs. 20. The ordering cost per order is Rs. 15 and carrying charges are 15% of the average inventory per year. What should be the optimum order quantity?

Concept:

Economic order quantity is given by:

\({EOQ}= \sqrt {\frac{2DC_o}{C_h}} \)

where D =  demand (unit/time), C_o = ordering cost (Rs/order), C_h = cost of carrying inventory (Rs/unit/time)

Calculation:

Given:

D = 9000 \(\frac{{Units}}{{year}}\), Cost of one part (C) = Rs. 20, Co = Rs. 15/order

Ch = 15% of unit cost = \( \frac{{15}}{{100}} \times 20 = Rs.3/unit/year\)

Economic order quantity is:

\(\left( {EOQ} \right) = \sqrt {\frac{{2D{C_o}}}{{{C_h}}}} = \sqrt {\frac{{2 \times 9000 \times 15}}{3}} = 300~units\)