Economic Order Quantity For Rankers Only - YouTube

So in previous video we were thinking

is 100 our magic number

At anytime , our total cost. What is our total cost?

Total cost = cost of purchasing the raw material + total ordering cost of raw material + total

carrying cost of raw material

Can our total cost for 100 units can be more economical?

In Short , we are finding out is 100 the magic figure for us?

Or there can be other figure ?

Well, To solve this we have 2 ways!

1. RANKER APPROACH that i will teach you in this video!

Any one who wants to get a rank in CA Curriculum

You'll have to start thinking in this way

and develop your thinking in this way.

And the same topic I'll explain with another video in just the next video

And that is for the people who just want to pass, so you decide now

if you want to score a rank if you want to

learn how rankers think, you gotta see this video

And if you think that you just want to pass you just skip this video

Academically, you'll not be hurt by a single mark.

that is my guarantee. In the next video you'll understand this.

So if you're staying back, remember you gotta start

thinking like this. Ok, so what was our

basic question? Is 100 our magic figure?

is there any other figure, which gives better satisfaction

Better satisfaction as in, my total

cost that should be less than the total cost

as one of 100. So just to revise you,

I'll tell you our costing at 100

When we order 100 units together

When our quantity was 100 our total purchasing

cost of the raw material was 50000 units

what was our total ordering cost

so we'll again consider the ordering cost, what was our ordering cost?

My annual requirement, whatever my annual requirement of raw material

divided by the quantity ordered in a day

multiplied by my ordering cost per order

What was it? B. If I do this then,

this is equals to

my annual requirement of 5000 units divided by my quantity

what was my quantity? Correct? Multiplied by 16.

And my answer to this, what is it?

800 is the answer. another

let us look at carrying cost. What did we see in carrying cost

we found out that we have to find average quantity

What is average quantity? Because my

maximum is my quantity and minimum quantity is zero, what will be the average quantity?

The quantity I'm ordering divided by 2 into C. This will be method of computing the total

carrying cost. Which if I substitute here, what will it be? What quantity am I ordering.

At one time I'm ordering 100 quantities. 100 divide by 2 into C. C was my carrying cost

per unit per annum, which was 4. And hence the carrying cost which I'll get. What will

my carrying cost be? My carrying cost will be 200. And hence my total cost was 51000.

Correct? So I understood one thing. I understood one thing that as my order size will be small,

my ordering cost will be high but my carrying cost will be low. Now, if I think about this

in a meaningful graphical presentation, then can I do this. Suppose, can I make a graph

like this? Where, here I'll take the quantity that here is less quantity, which keeps on

increasing... Means I'll order 100, then 200, then 300 and

so on and on I'll take different different quantities. And can I make the ordering cost

and carrying cost graph here? Means this Y axis that I have here. The Y axis is for my

costs and the X axis is for quantities. Now there is one thing I understood very well,

that there is an inverse relationship between total ordering cost and the total carrying

cost. And I understood one more thing, that as my quantity will increase, as my quantity

will increase, means if I order more in one time what will happen? My total carrying cost

will keep on increasing. And as there will be more quantity, what else will happen? My

total ordering cost will decrease. Now, on the basis on this, can I think of something

like this that if I order 100 quantities, then what will be my carrying cost? It will

be a little less, see here less cost than a little more a little more a little more

a little more a little more a little more a little more. If I order 200 then a little

more, 300 - a little more, 400 - a little more, 500 - more, more, more.So if I make

my total carrying costs curve. Then won't my total carrying cost curve be such? Upward

rising, what do we call it? Our total carrying costs curve. And similarly won't our total

carrying costs curve be something such. If we order less, the ordering costs will be

very high, as we increase the ordering order size, same way what else will happen? The

ordering cost will keep on decreasing. So won't the graph be something like this? Total

Ordering Cost. Correct? If I have total carrying cost, I have total carrying cost, then can

I make the graph of total cost? Exactly, it will be something like this, the total cost

graph. And when the total cost is least, when the total cost is least, I just have to find

out that out right? Mind you back again, what do I need? I want my total cost less than

51000. So when the total cost is least, that is my most advantageous place. If I make a

dotted line from there, towards where? Towards the quantity, then I'll be able to find out

right? This will be my golden quantity, as per this graph, whatever my graph is. But

here the most striking thing I found is that when my total cost was least, then if I was

drawing a line from there. I observed that it intersected. What was it intersecting?

When total ordering cost and total carrying cost were same, same as in see, at this point

what is the total carrying cost, this. And what is the total ordering cost? this. that

means at this point both my total ordering cost and total carrying cost both are same.

That means the point where my total ordering cost and my total carrying cost is same is

going to be my lowest point on my, is going to be the lowest point on my total cost. Did

you get it? Means I understood a very amazing thing. That if I want the total cost to be

least, then it'll be a point where my total ordering cost and the total carrying cost

will be same. Now, on the basis of this I can use my brain a little, see I know how

to compute my total ordering cost. My total ordering cost is computed by dividing my annual

requirement by my quantity that I'll order into B. And how is my total carrying cost

computed?The total quantity I'll order divide by 2 into C. So this will be my total ordering

cost and this will be my total carrying cost. If I can equate this two and find something,

see what is unknown in this equation. I have A, yes remember what is our A. Our A is 5000

raw materials for the year. Do i have Q? No Q I have to find out. Do I have B? Yes I do

have B. What is my B? 16. Correct? Do I have Q?No Q I have to find out. Do I have 2? 2

is a constant so everyone has it. Do I have C? Yes C I have and what was it? It was 4.

So can I use this, because one equation if there is only 1 unknown I can solve it. So

I'll just write it in a better way and solve it for you. So, A by Q into B should be equal

to Q by 2 into C. Therefore can I do this, that I'll shift Q on the other side so here

what will I have? A into B divide by C and shifting 2 here will be into 2. So what will

we have? A into B into 2 divide by D is equals to Q into Q. Did you get it? Is equals to

Q into Q. Can I write it in this way? Therefore, Q square is equals to 2 AB by C. Yes. So can

I also write it as my quantity is equals to under the root 2AB by C. So my magic quantity

should be such where I have the least cost. So what is my magic quantity? Q is equals

to under the root 2AB by C. Lets find out. What will I have? 2 I already know. What is

A? A is 5000. What is B? B is 16. divided by C What is my C? C is 4. So if I do this,

if I do this. What is my answer? So let's calculate this. If we calculate this, it is

going to be 2 into 5000 into 16 divided by 4 under the root. This gives me 200. Which

means my best quantity, my best quantity is how much? It is 200. AS per my thinking, what

my formula's thinking was, we will test whether this quantity of 200 is right or not. But

all those people who have seen this video can skip the next video as in the next video

I'm not teaching the derivation of the formula, I'll teach a very basic thing. So if you are

watching this video, skip the next video, you can even watch it if you want, there is

no issue. But you can skip the video as go directly to the next one after it, where we

will test whether 200 was the magic quantity or 100 was the magic quantity.