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Question

A food processing company uses 25,000 kg of corn flour every year. The quantity - discount price of corn flour is provided in the table below.
Quantity (kg) Unit Price (Rs/kg)
1 - 749 70
750 - 1499 65
1500 and above 60


The order processing charges are Rs. 500/ order. The handling plus carry-over charge on an annual basis is 20% of the purchase price of the corn flour per kg. The optimal order quantity (in kg) is
  1. 1500

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Solution

The correct option is A 1500
Annual demand, D = 25000 kg,

Ordering cost, Co=Rs.500/order

Carrying cost or holding cost,

Ch= 20% of unit surface price.

In order to get EOQ, start checking from the lowest price.

1st case:

EOQ, Q=2DCoCh=  2×25000×50020100×60

= 1443.376 kg (not feasible)

II case:

EOQ, Q=2DCoCh=  2×25000×50020100×65

= 1386.75 kg (feasible)

Total annual cost =DC+2DCoCh

=65×25000+2×25000×500×0.2×65

=162500+18027.76=Rs.1643027.76

For 1500 kg,

Annual cost=DC+DQc0+Ch2Q

=25000×60+1500×20×602×100+250001500×500

=Rs.1517320.51

So, at 1500 kg purchase, cost is minimum then

EOQ = 1500 kg

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