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Economic Order Quantity

The document discusses the economic order quantity (EOQ) model, which is used to calculate the optimal order quantity that minimizes the total costs of ordering and carrying inventory. The EOQ model applies when demand is constant and orders are delivered in full when inventory reaches zero. It takes into account the fixed costs of placing each order and the variable holding costs of storing inventory. The formula for calculating EOQ is provided, along with examples of how to use it. Relevant costs like storage space, taxes, deterioration are also outlined.

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241 views4 pages

Economic Order Quantity

The document discusses the economic order quantity (EOQ) model, which is used to calculate the optimal order quantity that minimizes the total costs of ordering and carrying inventory. The EOQ model applies when demand is constant and orders are delivered in full when inventory reaches zero. It takes into account the fixed costs of placing each order and the variable holding costs of storing inventory. The formula for calculating EOQ is provided, along with examples of how to use it. Relevant costs like storage space, taxes, deterioration are also outlined.

Uploaded by

Pan Correo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Economic order quantity

also known as Wilson EOQ Model orWilson Formula The model was
developed by Ford W. Harris in 1913, but R. H. Wilson, a consultant who
applied it extensively, is given credit for his in-depth analysis

used to calculate the optimal quantity that can be purchased or produced


to minimize the cost of both the carrying inventory and the processing of
purchase orders or production set-ups.

EOQ applies only when demand for a product is constant over the year and each
new order is delivered in full when inventory reaches zero. There is a fixed cost for each
order placed, regardless of the number of units ordered. There is also a cost for each
unit held in storage, commonly known as holding cost, sometimes expressed as a
percentage of the purchase cost of the item.

Formula
Following is the formula for the economic order quantity (EOQ) model:

Where Q = optimal order quantity


D = units of annual demand
S = cost incurred to place a single order or setup
H = carrying cost per unit
RELEVANT COSTS

Holding cost (Carrying costs) represent the costs incurred on holding inventory in
hand.

Cost of providing the physical space to store the items


Taxes and insurance
Breakage, spoilage, deterioration, and obsolescence
Opportunity cost of alternative investment

h=lc
Example 1
A local distributor for a national tire company expects to sell approximately 9,600 steel-
belted radial tires of a certain size and tread design next year. Annual carrying cost is
$16 per tire, and ordering cost is $75. The distributor operates 288 days a year.

a. What is the EOQ?


b. How many times per year does the store reorder?
c. What is the length of an order cycle?
d. What is the total annual cost if the EOQ quantity is ordered?

Given:
D = (Demand in units per year)
9,600 tires per year

H = (Holding carrying cost per unit per year)

$16 per unit per year

S = (Ordering cost per order)


$75

*Note that D and H must be in the same units, e.g., months, years.
'Sensitivity Analysis'
A technique used to determine how different values of an
independent variable will impact a particular dependent variable
under a given set of assumptions. This technique is used within
specific boundaries that will depend on one or more input
variables, such as the effect that changes in interest rates will
have on a bond's price.

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