Tutu Pump Co. uses about 7500 valves per year. The valve costs Rs.15 per unit and the carrying cost is estimated to be Rs.3 per unit. The cost of placing an order and its processing is Rs.18. Calculate the Economic Order quantity (EOQ). Give any one benefit that Tutu Pump Co. derives after calculating the EOQ.

Question

Accepted Answer

Given:
- Annual demand (D) = 7,500 valves
- Cost per unit = ₹15
- Carrying cost per unit per year (C) = ₹3
- Cost of placing an order (P) = ₹18

**Calculation of EOQ:**
EOQ = √((2 × P × D) / C)
= √((2 × 18 × 7,500) / 3)
= √(2,70,000 / 3)
= √90,000
= **300 valves**

**Benefit of calculating EOQ:**
By ordering 300 valves at a time, Tutu Pump Co. can minimise its total inventory costs. The EOQ balances the ordering cost and carrying cost — ordering too frequently increases ordering costs, while ordering too much increases holding costs. At EOQ, these two costs are equal and total cost is at its minimum, resulting in significant cost savings for the company.