Question

A pharmaceutical company has an annual demand for 18,000 units of its medicine. For the production of units, company has to bear setting up cost and order processing cost of ₹ 220. Cost of manufacturing one unit is ₹ 1,250. Cost of carrying is 10% per annum. Calculate the economic batch quantity.

Hint:

EBQ helps balance setup costs and carrying costs for optimum production.

Answer 1

To calculate the Economic Batch Quantity (EBQ), we use the formula:
\[ EBQ = \sqrt{\frac{2DS}{C}} \]
where:
D = Annual demand = 18,000 units
S = Setup cost per batch = ₹ 220
C = Carrying cost per unit per annum
Carrying cost per unit per annum = 10% of cost per unit = 10% of ₹ 1,250 = ₹ 125
Now, putting the values into the formula:
\[ EBQ = \sqrt{\frac{2 \times 18,000 \times 220}{125}} \]
\[ = \sqrt{\frac{7,920,000}{125}} \]
\[ = \sqrt{63,360} \]
\[ = 251.71 \approx 252 \text{ units} \]
Therefore, the Economic Batch Quantity is **252 units**.
This means the company should produce 252 units per batch to minimize total setup and carrying costs.