4. Definition of eoq
“EOQ is essentially an accounting formula that
determines at which the combination of order
costs and inventory carrying cost are the least
The result is the most cost effective quality to
order In purchasing this known as order
quantity in manufacturing it is known as the
production lot size.
7. ECONOMIC ORDER QUANTITY
EOQ =√2AB / CS
A =Annual consumption (or) usage of material in
units
B =Buying cost per order
C =Cost per unit
S =Storage and carrying cost percentage per annum
8. EOQ =√2UO / C
U =Usage in units per annum
O =Ordering cost
C =Cost of carrying one unit in inventory during one year
9. Eoq =√2co / i
•C =Consumption of a material in units per year
•O =Ordering cost
•I =Interest and other carrying cost per unit per annum
10. Example
Economic order quantity and the number of order per year.
Monthly consumption 3,000 units
Cost per unit Rs.54
Ordering cost Rs.150 per order
Inventory carrying cost 20% of the average inventory.
EOQ =√2AB/CS
A=Annual consumption 3,000
B=Buying cost per unit Rs.150 per order
C=Cost per unit Rs.54
S=Storage and carrying cost 20%
Annual consumption =3,000 × 12 =36,000
=√2 × 36,000 × 150/ 54 × 20/ 100
=√10800000 / 10.8
=√10,00,000
=1000
Number of order per year =36000 / 1000 =36
Frequency of orders =Days or month on the year / No, of order per annum
=365 / 36 =10days (or) 12 / 36 =1 / 3 Month
CONCLUSION :
An order is to be placed once in 10days or 1/3 of a month for 1000 units each time.
