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EOQ is also known reorder quantity (ROQ). <\/span><\/p>\n In EOQ, total cost of holding inventory is minimum and ordering cost is equal or minimum to storage cost of materials. <\/span><\/p>\n While determining EOQ, ordering cost and carrying cost should be consider.<\/span><\/p>\n \u00a0<\/span><\/b><\/p>\n Keep In Mind (KIM) <\/span><\/b><\/p>\n If purchasing quantity increases, carrying or holding cost also increases but ordering cost decreases.<\/span><\/p>\n<\/td>\n<\/tr>\n If purchasing quantity decreases, carrying cost also decreases but ordering cost increases.<\/span><\/p>\n<\/td>\n<\/tr>\n Carrying cost is calculated always on purchase price not on sales price.<\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n \u00a0<\/span><\/p>\n Ordering cost is re-purchase cost and is repeated in nature. <\/span><\/p>\n Purchase of large quantity of materials helps to reduce ordering cost; it includes:<\/span><\/p>\n \u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <\/span><\/span>Salary of staff related to purchasing, inspection and tour.<\/span><\/p>\n \u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <\/span><\/span>Transportation expenses, transit insurance etc.<\/span><\/p>\n \u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <\/span><\/span>Cost of stationery, postage, telephone, fax etc related to purchasing.<\/span><\/p>\n \u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <\/span><\/span>Cost of paper work as tender, quotation, advertisement etc.<\/span><\/p>\n \u00a0<\/span><\/b><\/p>\n It is also known keeping cost and holding cost. <\/span><\/p>\n The carrying cost suggests purchasing small quantity of materials. <\/span><\/p>\n If small quantity is purchased, the storage cost will be low. <\/span><\/p>\n It is the expenses related to after material purchased; it includes:<\/span><\/p>\n \u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <\/span><\/span>Salary of store keeper and related to holding of materials.<\/span><\/p>\n \u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <\/span><\/span>Rent of go-down or warehouse<\/span><\/p>\n \u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <\/span><\/span>Insurance cost of materials<\/span><\/p>\n \u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <\/span><\/span>Interest on capital which is blocked on materials purchased<\/span><\/p>\n \u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <\/span><\/span>Losses due to breakage, spoilage (date expired), obsolescence (old fashioned).<\/span><\/p>\n \u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <\/span><\/span>Desire rate of return from investment in inventory.<\/span><\/p>\n \u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <\/span><\/span>Cost of stationery, postage, telephone, fax, e-mail etc related to holding of materials etc.<\/span><\/p>\n \u00a0<\/span><\/p>\n \u00a0<\/span><\/p>\n Keep in Mind (KIM) <\/span><\/b><\/p>\n Some important synonyms or abbreviations<\/span><\/b><\/p>\n<\/td>\n<\/tr>\n A <\/span><\/b>= annual requirement or need<\/b><\/span><\/p>\n<\/td>\n<\/tr>\n O <\/span><\/b>= ordering cost per order, administrative cost per order, procurement cost per order<\/b><\/span><\/p>\n<\/td>\n<\/tr>\n C<\/span><\/b> = carrying cost per order, holding cost per order, production cost per order<\/b><\/span><\/p>\n<\/td>\n<\/tr>\n P<\/span><\/b> = purchase price per unit, cost per unit<\/b><\/span><\/p>\n<\/td>\n<\/tr>\n Q <\/span><\/b>= quantity size or order size<\/b><\/span><\/p>\n<\/td>\n<\/tr>\n SQRT<\/span><\/b> = square root or <\/span>\u221a<\/span><\/b><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n \u00a0<\/span><\/p>\n \u00a0<\/span><\/b><\/p>\n Assumption to Determine the Economic Order Quantity<\/span><\/b><\/b><\/p>\n Major assumptions of EOQ are given below: <\/span><\/p>\n The fixed quantity is ordered at each re-ordering point.<\/span><\/p>\n Time lag in the placement of an order and its delivery, annual demand, carrying cost and ordering are certain.<\/span><\/p>\n Purchase price of an item is unaffected by the quantity ordered.<\/span><\/p>\n No stock outs occur.<\/span><\/p>\n While determining the economic order quantity, the management considers the cost of quality only to the extent that these costs affected ordering costs or carrying costs.<\/span><\/p>\n \u00a0<\/span><\/p>\n EOQ can be determined in three ways; they are:<\/span><\/b><\/p>\n 1. Mathematical or formula method<\/span><\/p>\n 2. Trial and error method<\/span><\/p>\n 3. Graphic method\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <\/span><\/p>\n \u00a0<\/span><\/p>\n \u00a0<\/span><\/b><\/p>\n Here, SQRT means square root <\/span><\/i><\/p>\n EOQ (in units)<\/span><\/p>\n<\/td>\n = SQRT 2AO \u00f7<\/span> C <\/span><\/p>\n<\/td>\n<\/tr>\n EOQ (in order)<\/span><\/p>\n<\/td>\n = A \u00f7<\/span>\u00a0 EOQ units<\/span><\/p>\n<\/td>\n<\/tr>\n EOQ (in cost)<\/span><\/p>\n<\/td>\n = SQRT 2AOC<\/span><\/p>\n<\/td>\n<\/tr>\n \u00a0<\/span><\/p>\n<\/td>\n<\/tr>\n Average period between the orders<\/span><\/p>\n<\/td>\n = <\/span>EOQ units \u00d7 Days in year \u00f7<\/span> Annual require <\/span><\/p>\n<\/td>\n<\/tr>\n Length of inventory circle<\/span><\/p>\n<\/td>\n =<\/span> <\/b>Days in year \u00f7<\/span> No. of order<\/span><\/p>\n<\/td>\n<\/tr>\n Or <\/span><\/p>\n<\/td>\n = <\/span>EOQ units \u00f7<\/span> Daily use<\/span><\/p>\n<\/td>\n<\/tr>\n \u00a0<\/span><\/p>\n<\/td>\n<\/tr>\n EOQ total cost, there are different methods to find out total cost<\/span><\/p>\n<\/td>\n<\/tr>\n Total cost excluding cost of materials (order size is NOT given)<\/span><\/p>\n<\/td>\n = SQRT 2AOC <\/span><\/p>\n<\/td>\n<\/tr>\n Total cost including cost of materials (order size is NOT given)<\/span><\/p>\n<\/td>\n = (A\u00d7P) +<\/span> SQRT 2AOC<\/span><\/p>\n<\/td>\n<\/tr>\n Total cost including cost of materials discount (order size is NOT given)<\/span><\/p>\n<\/td>\n = (A\u00d7P \u2013 Discount) \n\n
\n \n \n \n \n \n Ordering cost<\/span><\/b><\/b><\/h3>\n
Carrying cost<\/span><\/b><\/b><\/h3>\n
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