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| A book shop sells pens – 30,000 qty per year. Demand is uniform. Purchase cost is Rs 6/- per pen. Holding cost per annum is 20% of purchase cost. Ordering cost is Rs 500/- per order. What should be the EOQ for the shop keeper? |
5000 pens 6000 pens 5500 pens 4500 pens |
| 5000 pens |
| Formula for calculating EOQ (Q) =\(\sqrt\frac{2PD}{C} \) where D= Annual Demand for the item (SKU) P: Cost of placing and receiving one Order (does not include purchase price) C: Inventory carrying cost per unit. This may be derived by multiplying the unit price of the item by the carrying cost expressed as %age of the unit price. S: Safety Stock level for the item. Here, D = 30,000; P = 500 and C = 1.2 (20% of 6) So 2 x P x D = 3,00,00,000 This divided by 1.2 = 2,50,00,000 Square root of which is = 5,000 So the EOQ is 5,000 pens. |
