The basic EOQ model makes the following assumptions:

 i) The demand is known and constant over the year

ii) The ordering cost is constant per order and certain

iii) The holding cost is constant per unit per year

iv) The purchase cost is constant (Thus no quantity discount)

v) Back orders are not allowed.


ABC Ltd requires 2,000 units of a component in its manufacturing process in the coming year which costs Sh.50 each. The items are available locally and the leadtime in one week. Each order costs Sh.50 to prepare and process while the holding cost is Shs.15 per unit per year for storage plus 10% opportunity cost of capital.


a) How many units should be ordered each time an order is placed to minimize inventory costs?

b) What is the reorder level?

c) How many orders will be placed per year?