ECONOMIC ORDER QUANTITY

Actually Economic Order Quantity leads to the question that is which quantity should be ordered in order to minimize the expenses. When a new order is placed certain type or expenses are related to it , like ordering cost & holding cost of inventory.

Economic order quantity applies only when the demand of the product and the ordering cost are constant over the period. Obviously it seems unrealistic :) , anyway, it also held a cost i.e holding cost for each unit.

FORMULA:

 

Q = Economic order quantity

C = cost of ordering

D = Demand during the period

h = Cost of holding one unit of inventory

Let say :

Purchase cost / unit = $ 18

Demand for the year = 50,000 units

Holding cost / unit = $ 5

Cost of placing an order = $ 50

E.O.Q = 1000 units.

This is the quantity that should be placed at one time so that to achieve the minimum related costs.