Assuming that replacement rate is instantaneous determine the optimum order quantity.

The demand for an item is 18000 units per year. The holding cost is Rs. 1.20 per unit time and the cost of storage is Rs. 5.00. The production cost is Rs. 400.00 assuming that replacement rate is instantaneous determine the optimum order quantity.


Solution:
Annual Demand = 18000 Units
Holding cost = Rs 1.20 per unit
Storage cost = Rs 5 per unit
Total Storage cost = Rs 6.20 per unit
Cost of Placing an order = Rs 400

Economic Order Quality = sqrt of 2v * p/s
Where U = Annual Demand
P = Cost of Placing an order
S = Storage cost

= sqrt of 2 * 18000 * 400/6.20
= 1524 Units