Question:

Patriot Company predicts that it will use 360,000 gallons of material during the year. The material is
expected to cost 5 per gallon. Patriot anticipates that it will cost 72 to place each order.

The annual carrying cost is 4 per gallon.

a. Determine the most economical order quantity by using the EOQ formula.
b. Determine the total cost of ordering and carrying at the EOQ point.

Solution:

a)

2 × 𝑂𝑟𝑑𝑒𝑟 𝑐𝑜𝑠𝑡 × 𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑚𝑎𝑛𝑑

𝐸𝑂𝑄 = √
𝐴𝑛𝑛𝑢𝑎𝑙 𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

2 × 72 × 360,000
𝐸𝑂𝑄 = √
4

51,840,000
𝐸𝑂𝑄 = √
4

𝐸𝑂𝑄 = √12,960,000

𝐸𝑂𝑄 = 3600 𝐺𝑎𝑙𝑙𝑜𝑛𝑠

b)
𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑚𝑎𝑛𝑑 360,000
𝐴𝑛𝑛𝑢𝑎𝑙 𝑂𝑟𝑑𝑒𝑟 = = = 100 𝑂𝑟𝑑𝑒𝑟
𝑃𝑒𝑟 𝑂𝑟𝑑𝑒𝑟 3600

Ordering Cost: (100 orders ×72 per order)

𝐎𝐫𝐝𝐞𝐫𝐢𝐧𝐠 𝐂𝐨𝐬𝐭 = 𝟏𝟎𝟎 𝐨𝐫𝐝𝐞𝐫𝐬 × 𝟕𝟐 𝐩𝐞𝐫 𝐨𝐫𝐝𝐞𝐫 = 𝟕𝟐𝟎𝟎

𝟏
𝑪𝒂𝒓𝒓𝒚𝒊𝒏𝒈 𝑪𝒐𝒔𝒕 = {( × 𝑬𝑶𝑸) + 𝑺𝒂𝒇𝒆𝒕𝒚 𝑺𝒕𝒐𝒄𝒌} × 𝑪𝒂𝒓𝒓𝒚𝒊𝒏𝒈 𝒄𝒐𝒔𝒕 𝒑𝒆𝒓 𝒖𝒏𝒊𝒕
𝟐

𝟏
𝑪𝒂𝒓𝒓𝒚𝒊𝒏𝒈 𝑪𝒐𝒔𝒕 = {( × 𝟑𝟔𝟎𝟎) + 𝟎} × 𝟒
𝟐

𝑪𝒂𝒓𝒓𝒚𝒊𝒏𝒈 𝑪𝒐𝒔𝒕 = (𝟏𝟖𝟎𝟎) × 𝟒 = 𝟕𝟐𝟎𝟎

𝑻𝒐𝒕𝒂𝒍 𝑶𝒓𝒅𝒆𝒓𝒊𝒏𝒈 & 𝑐𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 = 7200 + 7200

𝑻𝒐𝒕𝒂𝒍 𝒐𝒓𝒅𝒆𝒓𝒊𝒏𝒈 & 𝑐𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 = 14000