Question

A company sells 2,000 units of a product annually. The ordering cost per order is ₹ 400, and the holding cost per unit per year is ₹ 10. The lead time for delivery is 10 days, and the daily demand for the product is 40 units.

1. Calculate the Economic Order Quantity (EOQ).  (1)
2. Calculate the Re-order Level for the company.  (2)
3. State the importance of calculating Re-order Level by the company.  (2)

Answer 1

Given:

Annual Demand (D) = 2,000 units

Ordering Cost (P) = ₹ 400 per order

Holding Cost (C) = ₹ 10 per unit per year

Lead Time = 10 days

Daily Demand = 40 units

I. Economic Order Quantity (EOQ) = `sqrt((2"PD")/"C")`

= `sqrt((2 xx 400 xx 2000)/10)`

= 400 units

II. Re-order Level (ROL) = Lead Time (in days) × Daily Demand

= 10 × 40

= 400 units

III. The Re-order Level ensures that the company places an order before its inventory runs out. In this case, once the inventory falls to 400 units, the company should place a new order to avoid stockouts.