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Economic Order Quantity and Economic Production Lot Size Analysis for Inventory Management

A study on inventory management, focusing on economic order quantity and economic production lot size analysis to optimize stock control.

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    Economic Order Quantity and Economic Production Lot Size Analysis for Inventory Management Company A’s demand is uniform throughout the year and totals 18,000 units per year. Ordering costs total $38 per order. The annual holding cost rate is 26% of the value of the inventory. The per - unit cost of inventory is $12. Company B’s demand is uniform throughout the year and totals 15,000 units per year. The production setup costs total $84 per setup. The annual holding cost rate is 28% of the value of the inventory. The per - unit cost of finished product is $19. The production rate is constant and equivalent to 60,000 units per year. Task: Write a brief response in which you: A. Determine the order size for Company A in the given scenario that would minimize total annual cost by using the economic order quantity model, showing all of your work. Annual demand D = 18,000 units Ordering costs S = $38 per order Holding cost rate i = 26% = 0.26 Per unit cost of inventory C = $12 Thus, inventory carrying cost per unit h = C*i = $12*0.26 = $3.12 Order Size is EOQ 662 54 . 438461 12 . 3 1368000 12 . 3 38 * 18000 * 2 2 * = = = = = h DS Q Thus, Economic order size = 662 units B. Determine the lot size for Company B in the given scenario that would minimize total annual cost by using the economic production lot size model, showing all of your work. Annual demand D = 15,000 units per year Setup costs S = $84 per setup Annual Holding cost rate i = 28% = 0.28 per - unit cost of finished product C = $19 Production per year = 60,000 units Assuming 360 working days per year, Daily production rate p = 60,000/360 = 166 .667 units/day Daily demand rate d = 15,000/360 = 41.667 units per day

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