How an Electronics Firm Used EOQ to Lower Inventory Costs

Inventory decisions aren’t just about how much to order — they’re about how to minimize total cost. CK Electronics faced this exact challenge when ordering aluminum frames from a supplier offering bulk discounts. Let’s walk through how they used the Economic Order Quantity (EOQ) model to make the right call.

📦 The Setup

CK Electronics needs 5000 aluminum frames per year. The supplier offers two price tiers:

• Order 0–999 units: $50 per frame
• Order 1000+ units: $45 per frame

Other data:

• Ordering cost (K): $200 per order
• Holding cost (H): 40% of unit price

📐 Step 1: Calculate EOQ

Using the EOQ formula:

EOQ = √(2·D·K / H)  
Where D = 5000 units/year, K = $200, H = $20 (based on $50 unit price)  
EOQ = √(2·5000·200 / 20) = 316.23 units

This EOQ falls below the 1000-unit threshold, so the unit price would be $50.

💰 Step 2: Total Cost at EOQ

TC = P·D + D·K/Q + H·Q/2  
TC = 50·5000 + 5000·200/316.23 + 20·316.23/2  
TC ≈ $256,324.56

📉 Step 3: Try Bulk Discount

What if CK orders 1000 units at $45 each?

• H = 40% of $45 = $18

TC = 45·5000 + 5000·200/1000 + 18·1000/2  
TC = 225,000 + 1000 + 9000 = $235,000

✅ Final Decision

Ordering 1000 units at the discounted price gives a lower total cost:

$256,324.56 − $235,000 = $21,324.56 saved per year

Even though 1000 units is above the EOQ, the price break makes it the better choice.

🧠 What Students Should Learn

• ✔ EOQ minimizes cost — but price breaks can change the optimal quantity
• ✔ Always compare total cost, not just EOQ
• ✔ Holding cost depends on unit price

🚫 Common Mistakes

• ❌ Using EOQ blindly without checking price tiers
• ❌ Forgetting to adjust holding cost when price changes
• ❌ Ignoring the impact of order quantity on unit price

Need help with your own EOQ or inventory optimization problem? Reach out directly — fast, expert help with no middlemen.