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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