Determining Optimum Batch SizeA distributor sells industrial tools. He has a sales estimate of ₹20 crores for the upcoming year. Each tool sells for ₹10,000. Assume that the demand remains constant throughout the year.The set-up cost per order is ₹10,000 and the inventory holding cost per tool is 10% of its selling price.What is the optimum no.of batches requiredto meet the annual demand? (You should round up your answer to avoid a shortfall.)
Question
Determining Optimum Batch SizeA distributor sells industrial tools. He has a sales estimate of ₹20 crores for the upcoming year. Each tool sells for ₹10,000. Assume that the demand remains constant throughout the year.The set-up cost per order is ₹10,000 and the inventory holding cost per tool is 10% of its selling price.What is the optimum no.of batches requiredto meet the annual demand? (You should round up your answer to avoid a shortfall.)
Solution
To determine the optimum number of batches, we first need to calculate the annual demand.
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Calculate Annual Demand: The sales estimate for the upcoming year is ₹20 crores. Each tool sells for ₹10,000. So, the annual demand in units is ₹20 crores / ₹10,000 = 20,000 units.
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Calculate Economic Order Quantity (EOQ): The EOQ formula is √((2DS)/H) where D is the annual demand, S is the setup cost per order, and H is the holding cost per unit per year.
In this case, D = 20,000 units, S = ₹10,000, and H = 10% of ₹10,000 = ₹1,000.
So, EOQ = √((220,00010,000)/1,000) = √(400,000,000) = 20,000 units.
- Calculate Optimum Number of Batches: The optimum number of batches is the annual demand divided by the EOQ.
So, the optimum number of batches = 20,000 units / 20,000 units = 1 batch.
Therefore, the optimum number of batches required to meet the annual demand is 1. However, since we are asked to round up to avoid a shortfall, the answer is 2 batches.
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Feedback:Think about the formula to calculate the optimum no of batches and try again.
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