# Eoq Solution

**Topics:**Economic order quantity, Inventory, Newsvendor

**Pages:**4 (757 words)

**Published:**April 17, 2013

Let the parameters from the basic EOQ model.

d= constant demand rate

K= setup cost for placing one order

Q= order quantity

h=inventory holding cost per unit of product per unit of time p= shortage cost per unit of product per unit of time

S= inventory level just after an order of size Q arrives

So,

Q– S = Shortage in inventory just before an order of Q units is added

Production or ordering cost per cycle = K+cQ, where cQ is the unit cost

During each cycle, the inventory level is positive for a time: = Sd

The average inventory level during this time is: = ( S + 0)2= S2 units

The corresponding cost is = hS2per unit time

Therefore, the Holding cost per cycle= hS2 × Sd=hS22d

During each cycle, the shortage occurs for a time: = (Q – S)d

The average amount of Shortages during this time is: = ( 0 + Q - S)2= (Q - S)2 units

The corresponding cost is = p (Q-S)2per unit time

Therefore, the Shortage cost per cycle = p (Q-S)2 × (Q-S)d=p(Q-S)22d Q.1a)Hence, Total cost per cycle = K+cQ+ hS22d+ p(Q-S)22d

Total Cost per unit of time:

T= K+cQ+ hS22d+ pQ-S22dQd=dKQ+dQ+ hS22Q+ p(Q-S)22Q

Q.1b)By setting the partial derivatives∂T∂S=0and ∂T∂Q=0

So that,∂T∂S= 0+ 2hS2Q- p [2 Q – S (-1)]2Q =0

∂T∂S= hSQ- p (Q - S)Q =0

hS= p (Q - S)

S= pQh+p-------(1)

Also,∂T∂Q= - 2dK2Q2 – 2hS4Q2+ ( 2p Q – S2Q- 2p Q – S24Q2) =0

∂T∂Q= - dKQ2 – hS2Q2+ p Q – SQ- p Q – S22Q2 =0

dKQ2 + hS2Q2 =p Q – SQ- p Q – S22Q2

2dkQ2 +hS =2Qp Q – S- p Q – S2

Q2=2dKp+ h+ppS2-------(2)

Putting (1) into (2):

Q*2=2dKp+ h+pp(pQh+p)2

Q*2=2dKh ∙ p+hp

Q*= 2dKh∙ p + hp-------(3)

Q.1b)Putting (3) into (1):

S*= ph+p ( 2dKh∙ p + hp)

S*= 2dKh∙ pp+h

Q.1c)With refer to Part (Q.1a):

The Holding cost per unit of time= hS22d/ ( Qd)

The Shortage cost per unit of time...

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