The yearly production of a company's product which has a steady market is 40,000 units. Each unit of a product requires 1 kg. of raw material. The…

Working notes 1. Annual production = 40,000 units 2. Raw material required for 40,000 units (40,000 units × 1 kg.) = 40,000 kg. 3. EOQ = √(2 × 40,000 kgs. × ₹ 1,000 /20) = 2,000 kgs. 4. Total cost of procurement and storage when the order size is equal to EOQ or 2,000 kg. No. of orders (40,000 kg. ÷ 2,000 kg.) = 20 timesOrdering cost (20 orders × ₹ 1,000) = 20,000Carrying cost (₹) (1/2 × 2,000 kg. × ₹ 20) = 20,000Total cost = 40,000 (i) Re-order point = Safety stock + Lead time consumption = 1,000 kg. + (40,000kg. / 360 days) x 36 days= 1,000 kg. + 4,000 kg. = 5,000 kg. (ii) Statement showing the total cost of procurement and storage of raw materials (after considering the discount) Order size No. of order Total cost of procurement (₹) Average stock (Kg.) Total cost of storage of raw materials (₹) Discount (₹) Total cost (₹) Kg. (1) (2) (3)=(2)×1,000 (4)=1/2×(1) (5)=(4)×20 (6) (7)=[(3)+(5)-(6)] 40,000 1 1,000 20,000 4,00,000 40,000 3,61,000 20,000 2 2,000 10,000 2,00,000 32,000 1,70,000 10,000 4 4,000 5,000 1,00,000 20,000 84,000 8,000 5 5,000 4,000 80,000 4,000 81,000 (iii) Number of orders which the company should place to minimize the costs after taking EOQ also into consideration is 20 orders each of size 2,000 kg. The total cost of procurement and storage in this case comes to 40,000, which is minimum. (Refer to working notes 3 and 4)