SKEDSOFT

Observe the last column. The total cost goes on reducing and reaches the minimum of Rs. 200/- and then it increases

Hence we can say the optimal order quantity is 1000 units and optima number of orders is 8. Hence the optimal order quantity occurs when ordering cost is equal to the inventory carrying cost.

Economic Lot Size (for manufacturing model) or Economic Order Quantity (EOQ for purchase models) without shortage and deterministic Uniform demand

·         Here the quantity manufactured per batch is lot size (orderquantity in manufacturing model), fixed charges or set up cost per batch, which is shared by all the components manufactured in that batch is known as Set up cost (similar to ordering cost, as the cost of order is shared by the items purchased in that order), the cost of maintaining the in process inventory is the inventory carrying charges.

 Assumptions made:

1.Demand is uniform at a rate of ‘r’ quantity units per unit of time.

2.Lead time or time of replenishment is zero (sometimes known exactly).

3.Production rate is infinite, i.e. production is instantaneous.

4.Shortages are not allowed. (i.e. stock out cost is zero).

5.Holding cost is Rs. C₁ per quantity unit per unit of time.

6.Set up cost is Rs. C₃ per run or per set up.