Scribd Logo
Upload

Welcome to Scribd!

  • 51 views

    EOQ Formula and EOQ Factors

    Uploaded by

    Jennel
    The EOQ (economic order quantity) formula calculates the optimal inventory level to balance ordering and carrying costs. It takes into account the annual demand, ordering cost per order, and carrying cost per unit of inventory. The ordering cost includes expenses for placing and receiving an order. The carrying cost covers storage, opportunity costs, insurance, and other expenses for holding inventory. An example calculates the EOQ of 60 units for a retailer selling dog collars based on annual demand of 360 units, $10 ordering cost per order, and $2 carrying cost per unit.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd

    EOQ Formula and EOQ Factors

    Uploaded by

    Jennel
    51 views2 pages
    The EOQ (economic order quantity) formula calculates the optimal inventory level to balance ordering and carrying costs. It takes into account the annual demand, ordering cost per order, and carrying cost per unit of inventory. The ordering cost includes expenses for placing and receiving an order. The carrying cost covers storage, opportunity costs, insurance, and other expenses for holding inventory. An example calculates the EOQ of 60 units for a retailer selling dog collars based on annual demand of 360 units, $10 ordering cost per order, and $2 carrying cost per unit.

    Original Description:

    lecture

    Original Title

    -EOQ-formula-and-EOQ-factors

    Copyright

    © © All Rights Reserved

    Available Formats

    DOCX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The EOQ (economic order quantity) formula calculates the optimal inventory level to balance ordering and carrying costs. It takes into account the annual demand, ordering cost per order, and carrying cost per unit of inventory. The ordering cost includes expenses for placing and receiving an order. The carrying cost covers storage, opportunity costs, insurance, and other expenses for holding inventory. An example calculates the EOQ of 60 units for a retailer selling dog collars based on annual demand of 360 units, $10 ordering cost per order, and $2 carrying cost per unit.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    51 views2 pages

    EOQ Formula and EOQ Factors

    Uploaded by

    Jennel
    The EOQ (economic order quantity) formula calculates the optimal inventory level to balance ordering and carrying costs. It takes into account the annual demand, ordering cost per order, and carrying cost per unit of inventory. The ordering cost includes expenses for placing and receiving an order. The carrying cost covers storage, opportunity costs, insurance, and other expenses for holding inventory. An example calculates the EOQ of 60 units for a retailer selling dog collars based on annual demand of 360 units, $10 ordering cost per order, and $2 carrying cost per unit.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    You are on page 1of 2

    EOQ formula and EOQ factors

    The EOQ formula is as follows.

    EOQ = Square root of [(2 x demand x ordering cost) / carrying cost]

    Demand

    The demand remains constant according to the assumptions made by EOQ. The demand is how
    much inventory is used per year or how many units are sold per year.

    Ordering cost

    The EOQ formula contains the ordering cost which is a fixed cost. This is how much you spend
    on placing and then receiving your order. This cost includes all the resources you need to put into
    receiving the order. For instance, making calls, sending reminder emails, and taking delivery-
    related costs are used to calculate the ordering cost. It includes the time it takes for the order to
    reach you as well. Ordering cost can be calculated by dividing the demand per year by volume
    per order. When you have to pay a fixed amount for the order regardless of order quantity, you
    can calculate ordering cost per year by dividing demand per year by volume per order multiplied
    by set cost.

    Carrying cost

    The carrying cost is also known as the storage cost or holding cost of inventory. It is what you
    need to spend to store your inventory in a warehouse. The carrying cost includes warehouse fees
    and opportunity costs. If the inventory is destroyed or stolen from the warehouse then it can be a
    part of the carrying cost. If you are paying interest to purchase inventory, then the amount you
    are paying to the bank should be made part of the carrying costs. The insurance costs with regard
    to the inventory are also taken into account in carrying cost calculation. Carrying costs are
    variable costs as they will depend on your inventory.

    EOQ formula example


    EOQ formula is best understood with a simple example. Let us say that you are a dog products
    retailer. You sell leashes, muzzles, brushes, treats, collars, chews, bowls, dog food, and more.
    You want to know how much inventory of designer collars you should keep. You sell each
    designer collar for $7. In a month you sell 30 collars which equate to 360 collars per year. The
    ordering cost is $10 per order because you are taking into account the processing time and people
    who work for you. The carrying cost for collars is $2 per unit and this includes the opportunity
    cost.

    Here is how the economic order quantity is calculated for this scenario.

    EOQ = Square root of [(2 x demand x ordering cost) / carrying cost]


    EOQ = Square root of [(2 x 360 x 10) / 2]

    EOQ = Square root of [3600]

    EOQ = Square root of [3600]

    EOQ = 60

    This means you need to have at least 60 collars in the inventory to ensure you are rightly stocked
    at any given time. You can use the same EOQ formula to calculate how many leashes, muzzles,
    treats, and chews you should keep so you avoid understocking and overstocking.

    You might also like