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    Economic Order Quantity (EOQ) : Name:Syed Ahsan Raza Roll no:L1F19BSAF0065 Section:B

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    Ahsan Raza
    The document discusses economic order quantity (EOQ), which is the optimal inventory size that minimizes total annual inventory costs. It is computed by considering ordering costs incurred with each purchase from suppliers as well as holding costs for storing inventory. The EOQ formula is presented along with an example calculation. Limitations of the EOQ model are noted, such as the assumptions of constant demand and costs.

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    Economic Order Quantity (EOQ) : Name:Syed Ahsan Raza Roll no:L1F19BSAF0065 Section:B

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    Ahsan Raza
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    The document discusses economic order quantity (EOQ), which is the optimal inventory size that minimizes total annual inventory costs. It is computed by considering ordering costs incurred with each purchase from suppliers as well as holding costs for storing inventory. The EOQ formula is presented along with an example calculation. Limitations of the EOQ model are noted, such as the assumptions of constant demand and costs.

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    Ahsan CMA

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    The document discusses economic order quantity (EOQ), which is the optimal inventory size that minimizes total annual inventory costs. It is computed by considering ordering costs incurred with each purchase from suppliers as well as holding costs for storing inventory. The EOQ formula is presented along with an example calculation. Limitations of the EOQ model are noted, such as the assumptions of constant demand and costs.

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    © All Rights Reserved
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    44 views3 pages

    Economic Order Quantity (EOQ) : Name:Syed Ahsan Raza Roll no:L1F19BSAF0065 Section:B

    Uploaded by

    Ahsan Raza
    The document discusses economic order quantity (EOQ), which is the optimal inventory size that minimizes total annual inventory costs. It is computed by considering ordering costs incurred with each purchase from suppliers as well as holding costs for storing inventory. The EOQ formula is presented along with an example calculation. Limitations of the EOQ model are noted, such as the assumptions of constant demand and costs.

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    © All Rights Reserved
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    Name:Syed Ahsan Raza

    Roll no:L1F19BSAF0065
    Section:B

    Economic order quantity (EOQ)


    Economic order quantity (EOQ) is the order size that minimizes the sum of ordering
    and holding costs related to raw materials or merchandise inventories. In other words, it
    is the optimal inventory size that should be ordered with the supplier to minimize the
    total annual inventory cost of the business. Other names used for economic order
    quantity are optimal order size and optimal order quantity.

    The economic order quantity is computed by both manufacturing companies and


    merchandising companies. Manufacturing companies compute it to find the optimal
    order size of raw materials inventory and merchandising companies compute it to find
    the optimal order size of ready to use merchandise inventory.

    Ordering costs:

    The ordering costs are the costs that are incurred every time an order for inventory is
    placed with the supplier. Examples of these costs include telephone charges, delivery
    charges, invoice verification expenses and payment processing expenses etc.

    Holding costs:

    The holding costs (also known as carrying costs) are the costs that are incurred to
    hold the inventory in a store or warehouse. Examples of costs associated with holding
    of inventory include occupancy of storage space, rent, shrinkage, deterioration,
    obsolescence, insurance and property tax etc.

    Economic order quantity formula


    The following formula is used to determine the economic order quantity (EOQ):
    Where,

     D = Demand per year


     Co = Cost per order
     Ch = Cost of holding per unit of inventory

    Example:

    The material DX is used uniformly throughout the year. The data about annual
    requirement, ordering cost and holding cost of this material is given below:

     Annual requirement: 2,400 units


     Ordering cost: $10 per order
     Holding cost: $0.30 per unit
    Solution:

    Limitations of Using EOQ:


    The EOQ formula assumes that consumer demand is constant. The calculation also
    assumes that both ordering and holding costs remain constant. This fact makes it
    difficult or impossible for the formula to account for business events such as changing
    consumer demand, seasonal changes in inventory costs, lost sales revenue due to
    inventory shortages, or purchase discounts a company might realize for buying
    inventory in larger quantities.

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