EOQ (Economic Order Quantity)

-EOQ-
ECONOMIC ORDER
QUANTITY
VARGHESEKUTTY CB
varghesekutty997@gmail.com

WHAT IS
EOQ?
• Economic Order Quantity is one of the
technique of inventory control which
minimizes total holdings and ordering
cost of the year.
• This is a technique which solves the
problems of a materials manager.

DEFINITION
EOQ is essentially an accounting formula
that determines at which the combination of
order cost and inventory carrying cost are the
least. The result is the most cost effective
quality to order. In purchasing this is known
as order quantity, in manufacturing it is
known as the production lot size.
-Dave Piasecki

CONT.
• By using this model, the companies can minimize the costs
associated with the ordering and inventory holding.
• It can be a valuable tool for small business owners who
need to make decisions about how much inventory to keep
on hand, how many items to order each time, and how often
to reorder to incur the lowest possible costs.
• There are two most important categories of inventory costs
are ordering costs and carrying costs.

ORDERING
COST
• It is the costs that are incurred on obtaining
additional inventories.
• They include costs incurred on:
communicating the order, traveling allowance
and daily allowance to purchase officers,
printing and stationary, salary of purchase
department, cost of inspection, cost of receiving
the material, transportation cost etc.

CONT.
• All above cost, other than transport costs remain
unchanged per order irrespective of the order size.
• Therefore, it is assumed that ordering cost per order
remain constant.
• The more frequently orders are placed, and fewer the
quantities purchased on each order, the grater will be
ordering cost and vice versa.

ORDERING COST CURVE
• Here we can see that
when the size of the
order decreases the
ordering cost increases
and ordering cost
decreases when the size
of the order increases

CARRYING
COST
• It is the cost incurred for holding inventory in
hand.
• They include
interest on the money locked up in
stocks, storage costs, spoilage costs,
insurance, evaporation, godown rent,
pilferage, obsolescence etc.

• They are assumed to be constant per unit of inventory.
• The large the volume of inventory, the higher will be the
inventory carrying cost and vice versa
CONT.

CARRYING COST CURVE
• Here we can see that when
the order size increases the
storage cost also increases
and vice versa

ECONOMIC ORDER QUANTITY CURVE
• Ordering costs and carrying costs
are quite opposite to each other.
• If we need to minimize carrying
costs we have to place small
order which increases the
ordering costs.

CONT.
• If we want minimize ordering costs we have to place few
orders in a year and this requires placing large orders
which in turn increases the total carrying costs for the
period.
• We need to minimize the total inventory costs, Thus EOQ
is determine by the intersection of ordering cost curve and
carrying cost line.
• At this point total ordering cost is equal to total carrying
cost, and the total of the two costs is the least.

CALCULATION
OF EOQ
Where;
Co- ordering cost
Cc- carrying cost
A - annual requirement of the material in
. number of units
EOQ = √ Cc
2Co*A

QUESTION  X Ltd entered into a contract with a company
for purchase of 12,360 instruments at the rate
of rupees 235 per unit. Carrying cost is
estimated as 47 rupees per instrument.
Ordering cost is estimated as 2000 rupees.
Calculate EOQ.

Co= RS. 2000, Cc= RS. 47 per unit,
A= RS. 12,360
EOQ =√
47
2*2000*12,360
=1026
EOQ = √ Cc
2Co*A
SOLUTION

LIMITATIONS
OF EOQ
MODEL
• It is necessary for the application of EOQ
order that the demands remain constant
throughout the year which is not possible.
• Ordering cost per order can’t be constant
because it’s including transport cost.

BY,
VARGHESEKUTTY CB

EOQ (Economic Order Quantity)

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