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EOQ MODEL Variation

By Anonymous - Posted on 12 February 2012

There are several modifications that can be made to the basic EOQ model to fit particular circumstances. 2 that are often used are the monetary unti to lot-size model and the noninstantaneous receipt model.

Monetary unit lot size
The EOQ can be calculated in monetary units rather than physical units. The same EOQ formula given can be used with:
Ad = annual usage in dollars
S = ordering cost in dollars
I = carrying cost rate as a decimal of a percent

EOQ when costs are unknown
The EOQ formula depends upon the cost of ordering and the cost of carrying inventory. In practise, these costs are not necessarily known or easy to determine.
For a family of items, the ordering costs (S) and the carrying costs (c) are generally the same for each item.

Quantity Discount
When material is purchased, suppliers often give a discount on orders over a certain size. The buyer must decide whether to accept the discount and, in doing so, must consider the relevant costs:
- Purchase cost,
- Ordering costs,
- Carrying costs.

It can be said that taking the discount results in the following:
- There is a saving in purchase cost,
- Ordering costs are reduced because fewer orders are placed since larger quantities are being ordered,
- Inventory –carrying costs rise because of the larger order quantity.
The buyer must weigh the first 2 against the last and decide what to do. What count is the total cost. Depending on the figures, it may or may not be best to take the discount.

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