Determine the EOQ by increasing significantly the HOLDING COST between ten to tw
ID: 470283 • Letter: D
Question
Determine the EOQ by increasing significantly the HOLDING COST between ten to twenty times the amount used by the textbook. Present the formula and results of the new EOQ. You will keep the original demand (9,600 units) and ordering costs, S ($75) the same
Determine a second EOQ by decreasing the ORDERING COSTS to one tenth (1/10) or lower and keeping the original demand and holding costs, H ($16) the same.
Determine a third EOQ by increasing the holding cost to the level you selected and decreasing the ordering cost at the same time based on the last scenario. You keep the demand the same
Study the three scenarios and write a paragraph with your interpretation of results. What is the meaning, based on current business trends and technology, to have increasing holding costs and decreasing ordering costs? What is happening to the EOQ?
Submit one file with the three formulas and results and your concluding thoughts. As a reference, find attached a similar analysis done for a different EOQ case.
DATA
Annual Demand (D)= 1000 units per year
Ordering Cost (S)= $5.00 per order
Holding Costs (H)= $1.25 per unit
Q=(2DS/H)^0.5
Q=(2*1000*5/1.25)^0.5
Q= 89.4427191
DATA
Annual Demand (D)= 1000 units per year
Ordering Cost (S)= $1.00 per order
Holding Costs (H)= $6.25 per unit
Q=(2DS/H)^0.5
Q=(2*1000*1/6.25)^0.5
Q= 17.88854382
DATA
Annual Demand(D)= 1000 units per year
Ordering Cost (S)= $0.02 per order
Holding Costs (H)= $62.00 per unit
Q=(2DS/H)^0.5
(2*1000*0.02/62)^0.5
Q= 0.803219329 or one unit which is the equivalent to order when it is needed (JIT)
Explanation / Answer
Demand D = 9000 Units
Ordering Cost Co = $75
Holding Cost Ch = $16
EOQ = square root (2 * D * Co / Ch )
sqrt = square root
EOQ = square root (2 * 9000 * 75 / 16 ) = 290.47 = 291
EOQ 1:
Rise Ch 10 times:
Ch = (10 * $16) = 160 = $160
EOQ1 = square root (2*9000*75/160) = 92
Rise Ch 20 times:
Ch = 20 * $16 = $320
EOQ1a = square root (2*9000*75/320) = 65
This indicates that higher the holding cost, lower the EOQ, as it costly to hold, we do not want to order too many units and hold them. Hence EOQ is inversely proportional to the holding cost.
EOQ2
Co = (1/10) * 75 = 7.5
Further reduced to $5, $2, $1
EOQ2a = square root (2 * 9000 * 7.5 / 16) = 92
(Reducing the numerator value Co by 10 is same as increasing the denominator value Ch by 10 – hence we got the same EOQ of 92)
EOQ2b = square root (2 * 9000 * 5 / 16 ) = 75
EOQ2c = square root (2 * 9000 * 2 / 16 ) = 47
EOQ2d = square root (2 * 9000 * 1 / 16 ) = 34
EOQ is directly proportional to the Ordering Cost as when the ordering cost is reduced, EOQ reduces as well. As obvious, when the ordering cost is decreased, that means we can afford place orders more frequently – hence we can reduce the economic ordering quantity to save.
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