- A printing company estimates that it will require 1,000 reams of a certain type of paper in a given period. The cost of carrying one unit in inventory for that period is 50 cents. The company buys the paper from a wholesaler in the same town, sending its own truck to pick up the orders at a fixed cost of $20.00 per trip. Treating this cost as the order cost, what is the optimum number of reams to buy at one time? How many times should lots of this size be bought during this period? What is the minimum cost of maintaining inventory on this item for the period? Of this total cost, how much is carrying cost and how much is ordering cost?
This is an EOQ problem, even though the time period is not a year. All that is required is that the demand value and the carrying cost share the same time reference. This will require approximately 3.5 orders per period. Setup costs and carrying costs are each $70.71, and the annual total is $141.42.
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- Given the following data: D=65,000 units per year, S = $120 per setup, P = $5 per unit, and I = 25% per year, calculate the EOQ and calculate annual costs following EOQ behavior.
EOQ is 3533 units, for a total cost of $4,415.88