Context: 16. Determine EOQ: Consumption per month 5000 units; ordering cost per order Rs. 100; Cost per unit Rs. 30 and inventory carrying cost of 10% of the cost per annum Explain

The Economic Order Quantity (EOQ) is the number of units that a company should add to inventory with each order to minimize the total costs of inventory—such as holding costs, order costs, and shortage costs. The EOQ model assumes that demand is constant and that inventory is depleted at a fixed rate until it reaches zero. At that point, a specific number of items are ordered.

Here's how to calculate EOQ:

1. Identify the Demand: In this case, the consumption per month is 5000 units.

2. Determine the Order Cost (S): This is the cost incurred every time an order is placed. Here, it is Rs. 100.

3. Determine the Holding Cost (H): This is the cost to hold one unit of an item in inventory for one year. Here, it is 10% of the cost per unit per annum. Since the cost per unit is Rs. 30, the holding cost per unit per year is Rs. 3 (10% of 30).

4. Plug these values into the EOQ formula:

EOQ = sqrt((2DS)/H)

Where: D = Demand = 5000 units per month = 60,000 units per year S = Order Cost = Rs. 100 H = Holding Cost = Rs. 3

So, EOQ = sqrt((260,000100)/3) = sqrt(4,000,000) = 2000 units

So, the company should order 2000 units at a time to minimize its total inventory costs.