Question
What is EOQ? How it is calculated?
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Answer
Economic Order Quantity (EOQ) is an important tool in the purchase of raw materials and storage of finished goods. Generally to determine the optimal order of quantity of a particular item of inventory to be purchased at a particular time, which gives maximum economy to an entrepreneur, is called "EOQ”. It is calculated on the basis of the given formula:$\text{EOQ}=\sqrt{\frac{2\text{DP}}{\text{C}}}$
Where D = the annual usage (or demand) of the item in units P = the cost of place on order C = inventory carrying cost per unit (This may be derived by multiplying the unit price of the item by carrying cost expressed as % of the unit price.) The above formula minimizes the total cost of managing inventory consisting of ordering cost and carrying cost of inventory. The two costs are inversely related, when the one increases the other decreases with the change in the purchase quantity of inventory. It is a balance between the two opposing cost-carrying cost and order processing cost, can be achieved by computing the economic order quantity.
Where D = the annual usage (or demand) of the item in units P = the cost of place on order C = inventory carrying cost per unit (This may be derived by multiplying the unit price of the item by carrying cost expressed as % of the unit price.) The above formula minimizes the total cost of managing inventory consisting of ordering cost and carrying cost of inventory. The two costs are inversely related, when the one increases the other decreases with the change in the purchase quantity of inventory. It is a balance between the two opposing cost-carrying cost and order processing cost, can be achieved by computing the economic order quantity.
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