The Impact of Price Increase on Economic Order Quantity (EOQ)

Impact of Price Increase on EOQ

If the price of a medical glove increased by 40%, the EOQ (economic order quantity) would decrease. This is because the carrying cost per unit is lower than the ordering cost per order. As the price of the medical glove increases, the carrying cost per unit also increases, which leads to a decrease in the EOQ.

Calculation of New EOQ

To calculate the new EOQ, we can use the formula:

EOQ = √(2SD/O)

Where:

S = annual demand = 4,500,000 units

D = ordering cost = RM2,000 per order

O = cost per unit = RM1.50 x 1.40 = RM2.10

Using the values:

EOQ = 89,442 units

Elasticity of EOQ with Respect to Price

To calculate the elasticity of EOQ with respect to price, we can use the formula:

Elasticity = (% change in EOQ / % change in price)

Using the original EOQ of 149,071 units and the new EOQ of 89,442 units, the percentage change in EOQ is:

% change in EOQ = -40.04%

Using the original price of RM1.50 and the new price of RM2.10, the percentage change in price is:

% change in price = 40.00%

Therefore, the elasticity of EOQ with respect to price is:

Elasticity = -1.001

The negative sign indicates that the EOQ is inversely related to the price of the medical glove. A value of -1.001 indicates that for every 1% increase in the price of the medical glove, the EOQ will decrease by 1.001%.