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LAB 2

Economic Order Quantity Problems Solved in Excel Template

Abstract:
The problems related to economic order quantity are solved in Excel template in this lab. This
lab also explains the decision taken based on the results. The problem of this template is
limitation for graph but no such limitation is for numerical values. This will be shown in the
solved problems.
Introduction:
The economic order quantity (EOQ) model is an inventory control technique that minimizes
the total of ordering, setup and holding costs.
The Holding, Ordering, and Setup Costs are defined as:
1. Holding costs: The costs of holding or carrying inventory over time.
2. Ordering costs: The costs of placing an order and receiving goods.
3. Setup costs: The cost to prepare a machine or process for manufacturing an order.
The objective of most inventory models is to minimize total costs. With the assumptions just
given, significant costs are setup cost and holding cost. All other costs, such as the cost of the
inventory itself are constant. Thus, if the sum of setup and holding costs are reduced will
minimize the total costs. To help in visualize it, the graph is shown in figure below. As, it can
be observed that reduction or increase in any of these cost changes curve.

1. Annual setup cost = (Number of orders placed per year) x (Setup or order cost per
order)

2. Annual holding cost = (Average inventory level) x (Holding cost per unit per year.

3. Optimal order quantity is found when annual setup cost equals annual holding cost.

Problem Statement:
Solve five different problems related to EOQ on Excel template.
Procedure:
1. Open the inventory template of economic order quantity in Excel.
2. Change the respective values on the template by moving the arrow to change the
values.
3. The values and graph is changed respectively.
4. It becomes easy to observe the results generated by current system and compare the
values.
5. It is easy to reset the data in its original form.
Problems Solved in Template:
The problem solved in Excel template are given below with its snap shots.
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LAB 2

Problem 1: Sharp, Inc., a company that markets painless hypodermic needles to hospitals,
would like to reduce its inventory cost by determining the optimal number of hypodermic
needles to obtain per order. The annual demand is 1000 units; the setup or ordering cost is
$10 per order; and the holding cost per unit per year is $0.50.

Problem 2: Bernard Callebaut operates a chocolate shop in Kensington. The annual demand
for chocolate-covered cherries is 1,200 units. The setup cost is $6 per order. The holding cost
per unit per year is $0.7. What is the optimum number of units per order? What is the
expected number of orders per year?
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LAB 2

Problem 3: Assume you have a product with annual demand is 360 units, holding cost per
year is $1.00 per unit and Order cost = $100 per order. What is the EOQ for this product?

Problem 4: If D=8,000 per month, S=$45 per order, and H=$2 per unit per month, what is
the EOQ?

Problem 5: Medeline Thimmess Dream Store sells water beds and assorted supplies. Her
best-selling bed has an annual demand of 400 units. Ordering cost is $40; holding cost is $5
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LAB 2

per unit per year. To minimize the total cost, how many units should be ordered each time an
order is placed?

Conclusion:
Templates in Excel makes easy to solve the problems as values have to be inserted in it. The
only problem sometimes arises is about the graph limitation as we could see in few of the
problems solved. This depends from template to template and type of problem to be solved.