Economic Order Quantity Formula
Following is the economic order quantity formula. This formula has been explained with couple of simple examples.
EOQ = √2CoD/Ch |
Where
D= Annual Demand
C0 = Cost of Placing an order
Ch= Cost of Holding
Economic Order Quantity Formula Example
Annual Inventory Demand = 80,000
Cost of placing order = 100
Holding Cost per unit= .6
Calculate Economic order Quantity
Solution
EOQ = √2CoD/Ch
= √2(100)(80,000)/.6
= 5,164 units
Significance of economic order Quantity
Economic order quantity formula is used to calculate the most economical quantity to be ordered each time. This formula is based on the assumption that inventory management involved two main costs i.e. cost of order and cost of holding. This formula is used to minimize these both costs.
Assumptions of Economic Order Quantity
Economic order quantity assumes that demand during the remains would remain constant. Therefore such demand can be met by a standard order quantity. Economic order quantity also assumes that ordering and holding cost during the year would remain constant.
Advantages Economic Order Quantity
One of the major advantages of using economic order quantity is inventory order management. Inventory manager exactly knows the quantity to be order.
Limitations of Economic Order Quantity
Economic order quantity is calculated by a complex mathematical formula. This formula cannot be explained by an accountant. Economic order quantity does not take into account the fluctuation in demand (unrealistic assumption)
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