explain step by stepA company manufactures a standard electrical component and operates 12
months a year. The product has steady demand, and raw materials are ordered in
fixed batch quantities. All

Question

explain step by stepA company manufactures a standard electrical component and operates 12
months a year. The product has steady demand, and raw materials are ordered in
fixed batch quantities. All finished goods are shipped immediately after
production. The company wants to reduce its inventory-related costs by using the
Economic Order Quantity (EOQ) model.
Raw materials are delivered 5 working days after placing an order. The company
operates 24 working days per month.
Below is the relevant data:
Table: Operational Data
Parameter Value

Monthly Demand 8,000 units

Annual Demand 96,000 units

Unit Cost of Material 3400

Annual Holding Cost Rate 25% of unit cost

Ordering Cost per Order 32,000

Lead Time 5 working days

Working Days per Month 24 days

(A)
Use the EOQ formula to calculate the Economic Order Quantity.
(Show the formula and all steps.)
(B)
Based on the EOQ, calculate:
i) Number of orders placed per year
ii) Total ordering cost per year
©
Find the following:
i) Average inventory level
ii) Total annual holding cost
(D)
Calculate the Reorder Point (ROP) assuming uniform daily demand.
(E)
Draw a flowchart with these steps in order:

VIPSolutions · Accepted Answer

Let's solve each part step by step using the data provided.

---

### **(A) Calculate Economic Order Quantity (EOQ)**

**EOQ Formula:**
$$
EOQ = \sqrt{\frac{2DS}{H}}
$$

Where:  
- $ D $ = Annual demand = **96,000 units**
- $ S $ = Ordering cost per order = **₹2,000**
- $ H $ = Annual holding cost per unit  
  = Holding cost rate × Unit cost = **25% × ₹400 = ₹100**

**Plug in the values:**
$$
EOQ = \sqrt{\frac{2 \times 96,000 \times 2,000}{100}}
$$
$$
= \sqrt{\frac{384,000,000}{100}}
$$
$$
= \sqrt{3,840,000}
$$
$$
= 1,960 \text{ units (rounded to nearest unit)}
$$

---

### **(B) Based on EOQ, Calculate**
#### **i) Number of orders placed per year**
$$
\text{No. of orders per year} = \frac{D}{EOQ} = \frac{96,000}{1,960} \approx 49 \text{ orders}
$$

#### **ii) Total ordering cost per year**
$$
\text{Total ordering cost} = \text{No. of orders} \times S = 49 \times ₹2,000 = ₹98,000
$$

---

### **(C) Find the following**
#### **i) Average inventory level**
$$
\text{Average inventory} = \frac{EOQ}{2} = \frac{1,960}{2} = 980 \text{ units}
$$

#### **ii) Total annual holding cost**
$$
\text{Total holding cost} = \text{Average inventory} \times H = 980 \times ₹100 = ₹98,000
$$

---

### **(D) Calculate the Reorder Point (ROP)**
$$
\text{Daily demand} = \frac{\text{Annual demand}}{\text{No. of working days per year}}
$$
$$
\text{Working days per year} = 24 \text{ days/month} \times 12 = 288 \text{ days}
$$
$$
\text{Daily demand} = \frac{96,000}{288} = 333.33 \text{ units/day}
$$

$$
\text{ROP} = \text{Daily demand} \times \text{Lead time}
$$
$$
\text{ROP} = 333.33 \times 5 = 1,667 \text{ units}
$$

---

### **(E) Flowchart Steps**

Here’s a simple textual representation of the flowchart steps:

1. **[Start]**
2. **[Process] Place Order**
3. **[Process] Supplier Delivers**
4. **[Process] Store Raw Materials**
5. **[Process] Produce Goods**
6. **[Process] Dispatch Finished Goods**
7. **[End]**

You can draw this using flowchart shapes (rectangle for process, arrows for flow).

---

## **Summary Table**

| Calculation                    | Value           |
|------------------------------- |-----------------|
| EOQ                            | 1,960 units     |
| Number of Orders/Year          | 49              |
| Total Ordering Cost/Year       | ₹98,000         |
| Average Inventory Level        | 980 units       |
| Total Annual Holding Cost      | ₹98,000         |
| Reorder Point (ROP)            | 1,667 units     |

---

If you need the actual flowchart drawing, let me know and I can provide an image!

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