\n| \n If purchasing quantity increases, carrying\/holding cost also increases but ordering cost decreases.<\/span><\/p>\n<\/td>\n<\/tr>\n\n| \n If purchasing quantity decreases, carrying cost also decreases but ordering cost increases.<\/span><\/p>\n<\/td>\n<\/tr>\n\n| \n Carrying cost is calculated always on purchase price, not on sales price.<\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n <\/p>\n \u00a0<\/span><\/b><\/p>\n(A) Annual Requirement <\/span><\/b><\/b><\/h3>\nWhen manufacturing needs raw materials for production purpose, an annual requirement is needed. <\/span><\/p>\nRaw materials are converted into work in progress and finished goods.\u00a0 <\/span><\/p>\nThe quantity of material is measured in annual requirements.\u00a0 <\/span><\/p>\nAnnual requirement may be in half-yearly, monthly or weekly.\u00a0 <\/span><\/p>\n\u00a0<\/span><\/p>\n(B) Ordering Cost<\/span><\/b><\/b><\/h3>\nOrdering cost is a re-purchase cost and is repeated in nature. <\/span><\/p>\nThe purchase of a large quantity of materials helps to reduce ordering costs; it includes:<\/span><\/p>\nSalary of staff related to purchasing, inspection and tour etc.<\/span><\/p>\nTransportation expenses, transit insurance etc.<\/span><\/p>\nCost of stationery, postage, telephone, fax, e-mail etc related to purchasing.<\/span><\/p>\nCost of paperwork as tender, quotation, advertisement etc.<\/span><\/p>\n\u00a0<\/span><\/p>\n(C) Carrying Cost<\/span><\/b><\/b><\/h3>\nIt is also known as keeping cost and holding cost. <\/span><\/p>\nThe carrying cost suggests purchasing a small quantity of materials. <\/span><\/p>\nIf a small quantity is purchased, the storage cost will be low. <\/span><\/p>\nIt is the expenses related to after material purchased. It includes:<\/span><\/p>\nSalary of storekeeper and related to holding of materials.<\/span><\/p>\nRent of go-down or warehouse.<\/span><\/p>\nInsurance cost of materials.<\/span><\/p>\nInterest on capital which is blocked on materials purchased.<\/span><\/p>\nLosses due to breakage, spoilage (date expired), obsolescence (old fashioned), vermin<\/span> damage.<\/span><\/p>\nDesire rate of return from investment in inventory.<\/span><\/p>\nCost of stationery, postage, telephone, fax, e-mail etc related to holding of materials etc.<\/span><\/p>\n\u00a0<\/span><\/b><\/p>\nKeep in Mind (KIM) <\/span><\/b><\/p>\n\n\n\n| \n Some important synonyms or abbreviations of EOQ<\/span><\/b><\/p>\n<\/td>\n<\/tr>\n\n| \n A<\/span><\/b><\/p>\n<\/td>\n | \n = annual requirement or need.<\/b><\/span><\/p>\n<\/td>\n<\/tr>\n\n| \n O<\/span><\/b><\/p>\n<\/td>\n | \n = ordering cost per order, administrative cost per order, procurement cost per order.<\/span><\/p>\n<\/td>\n<\/tr>\n\n| \n C<\/span><\/b><\/p>\n<\/td>\n | \n = carrying cost per order, holding cost per order, production cost per order.<\/span><\/p>\n<\/td>\n<\/tr>\n\n| \n P<\/span><\/b><\/p>\n<\/td>\n | \n = purchase price per unit, cost per unit, material cost per unit.<\/span><\/p>\n<\/td>\n<\/tr>\n\n| \n Q<\/span><\/b><\/p>\n<\/td>\n | \n = quantity or order size.<\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n\u00a0<\/span><\/p>\nThe assumption to determine the economic order quantity <\/span><\/p>\nThe fixed quantity is ordered at each re-ordering point.<\/span><\/p>\nTime lag in the placement of an order and its delivery, annual demand, carrying cost and ordering are certain.<\/span><\/p>\nThe purchase price of an item is unaffected by the quantity ordered.<\/span><\/p>\nNo stock outs occur<\/span> (viz no theft, no lost, no date expiry) etc<\/span>.<\/span><\/p>\n\u00a0<\/span><\/p>\nEOQ can be determined in three ways:<\/span><\/p>\nMathematical or formula method<\/span><\/p>\nTrial and error method<\/span><\/p>\nGraphic method<\/span><\/p>\n\u00a0<\/span><\/span>![\"\"](\"https:\/\/eponlinestudy.com\/wp-content\/uploads\/2021\/05\/EOQ-by-Formulas.jpg\") <\/p>\n <\/p>\n Keep in Mind (KIM) <\/span><\/b><\/p>\n\n\n\n| \n The value of carrying cost (C) is less than the value of ordering cost (O).<\/b><\/span><\/p>\n<\/td>\n<\/tr>\n\n| \n Annual demand may be weekly, monthly and yearly.<\/span><\/p>\n<\/td>\n<\/tr>\n\n| \n Value of O and C also should be weekly, monthly and yearly.<\/span><\/p>\n<\/td>\n<\/tr>\n\n| \n If order size (Q) is not given, EOQ units are taken for EOQ cost.<\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n\u00a0<\/span><\/b><\/p>\nHere, Amount = Rs = $ = \u00a3 = \u20ac = <\/span>\u20b9<\/span> = Af = <\/span>\u09f3 <\/span>= Nu = Rf = <\/span>\u0dbb\u0dd4<\/span> = Br = P = Birr = Currency of your country<\/span>\u00a0 <\/span><\/p>\nPROBLEM: 2A<\/span><\/b><\/p>\nABC<\/span> Trading Concern has following information:<\/span><\/p>\n\n\n\n| \n Annual require<\/span><\/p>\n<\/td>\n | \n 6,000 units <\/span><\/p>\n<\/td>\n<\/tr>\n\n| \n Materials cost per unit<\/span><\/p>\n<\/td>\n | \n Rs 60<\/span><\/p>\n<\/td>\n<\/tr>\n\n| \n Ordering cost per order<\/span><\/p>\n<\/td>\n | \n Rs 500<\/span><\/p>\n<\/td>\n<\/tr>\n\n| \n Carrying cost per unit per year<\/span><\/p>\n<\/td>\n | \n Rs 15<\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\nRequired: \u00a0 (a) Economic order quantity; (b) No. of order; (c) Total cost without materials <\/span><\/p>\n[Answer: (a) 632 units; (b) 9 times; (c) Rs 9,487]<\/span><\/i><\/p>\nSolution: <\/span><\/b><\/p>\nEconomic order quantity (EOQ)<\/span><\/b><\/p>\n= SQRT (2AO \u00f7 C)\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0[\u2235 SQRT = square root]<\/span><\/p>\n= SQRT (2 x 6,000 x 500 \u00f7 15)<\/span><\/p>\n= SQRT (400,000)<\/span><\/p>\n= 632 units <\/span><\/p>\n\u00a0<\/span><\/i><\/b><\/p>\nExplain:<\/span><\/i><\/b> EOQ in units is the order of the units where an organization does not suffer about minimum stock or maximum stock level. <\/span><\/i><\/p>\n | | | | | | | | | | | | | | | | |
![\"\"](\"https:\/\/eponlinestudy.com\/wp-content\/uploads\/2021\/05\/economic-order-quantities-eoq-by-trial-and-error-method-eoq-inventory-management.jpg\")
<\/p>\n