ACC640 Week 5 Discussion Forum 1 Equivalent Units

Economic order quantity

Key concept

The fundamental concepts of economic order quantity are:

·         It is used to provide a limited number of items for a fixed time in an amount that satisfies demand.

·         The average cost per unit sold decreases as the quantity increases.

·         EOQ is used for many organizations and end uses to satisfy continuous or bursty purchase patterns, such as office supplies, retail stores, manufacturing production lines, food services organizations, and health care provisioning.

Benefits

The benefits of economic order quantity are that EOQ can help reduce costs by handling the “average” unit cost over all products while purchasing in bulk quantities at low basic prices. 

 EOQ is also an inventory management tool to reduce excess storage space and real estate costs. If demand is uncertain, or the size of a production run is variable, it may be cheaper to implement EOQ to avoid the cost of having excess inventory.

Computations

Computations associated with using economic order quantity (EOQ) involve measuring the cost per item and comparing it to the total cost (Huang,2017). EOQ is a type of inventory control method that uses a calculation formula to determine when additional goods should be ordered. If the total cost exceeds the variable costs, EOQ will determine that more goods are not required in the current order and production will slow down or stop completely. 

Assumptions

The assumptions associated with the use of EOQ for a manufacturing company are: 

(1) Costs are constant, time is not. 

(2) First-in, first-out (FIFO) order queue. 

(3) Only one purchase order can be submitted at a time and all of the quantities ordered are immediately necessary. There are no backorders or shortages in the supply chain. 

These assumptions can be violated if, for example, the company orders too much raw material at once to save on shipping costs. The materials arrive at their destination only to find that there is not enough room in the assembly lines to accommodate them.

Conflict

EOQ would conflict with a manager’s performance evaluation goals when performance evaluations are given criteria that is too narrow (Teng,2022). For example, a manager might assign the employee a numeric score according to how much time they take away from their responsibilities to meet with customers. An EOQ transaction would take a few hours of work and would not be considered part of an employee’s responsibilities. This can result in the overall performance evaluation being unfairly low for the team as employees could have been assigned scores that were actually fair but were offset by outsourced or very short transactions.

References

Huang, Y. F. (2017). Economic order quantity under conditionally permissible delay in payments. European Journal of Operational Research, 176(2), 911-924.

Teng, J. T. (2022). On the economic order quantity under conditions of permissible delay in payments. Journal of the operational research society, 53(8), 915-918.