Economic Order
Quantity (EOQ)
AFABLE, Lynel Arvey V.
Economic Order Quantity
• The ideal order quantity a company should purchase to minimize inventory costs
such as holding costs, shortage costs, and order costs
• Developed by Ford W. Harris in 1913
• The goal of the EOQ formula is to identify the optimal number of product units to
order.
• The formula can help a company control the amount of cash tied up in the
inventory balance.
• The EOQ formula determines a company's inventory reorder point.
Economic Order
Quantity Formula
Components of Economic Order Quantity
• Ordering Cost
• Annual Ordering Cost
• Holding Cost
• Total Cost and the Economic Order Quantity
Ordering Cost
• Ordering cost refers to the cost related to shipping and handling a new order. e.g.,
communication and transportation cost, and insurance.
Number of Order = D/Q
Where,
D = Annual quantity demanded
Q = Volume per order
Annual Ordering Cost
Annual Ordering Cost =D/Q × S
Where,
D = Annual quantity demanded
Q = Volume per order
S = Ordering cost
Holding Cost
• The holding or carrying cost is the total cost for keeping and
maintaining inventories in storage.
H = iC
Where,
H= Holding cost
i= Carrying cost
C= Unit cost
Holding Cost
• As such, the holding cost of the inventory is calculated by finding the sum
product of the inventory at any instant, and the holding cost per unit. It is
expressed as follows:
Annual Holding Cost =
Where,
H= Holding cost
Q= Volume per Order or EOQ units
𝑸
𝟐
× H
Total Cost and the Economic Order Quantity
Annual Total Cost (TC) =
𝑫
𝑸
× S +
𝑸
𝟐
×𝑯
Or
Annual Total Cost or Total Cost = Annual ordering cost + Annual
holding cost
Economic Order
Quantity Model
• The EOQ is the point at
which the costs of ordering and
keeping are minimized; the
point at which the costs are
equal to each other.
Formula and Calculation of Economic Order
Quantity (EOQ)
Q*=
𝟐𝑫𝑺
𝑯
Where:
D = demand per year
S = cost per order
H = cost of holding per unit of inventory
Example on Economic
Ordering Quantity
Orders
Order Cost
1
Php 150
2
Php 300
3
Php 450
4
Php 600
5
Php 750
6
Php 900
Order
Average
Holding
Quantity
Inventory
Costs
(12,000 ÷
(Order Quantity
(0.1 × Average
Orders)
÷ 2)
Inventory)
1
12,000
6,000
Php 600
2
6,000
3,000
Php 300
3
4,000
2,000
Php 200
4
3,000
1,500
Php 150
5
2,400
1,200
Php 120
6
2,000
1,000
Php 100
Orders
Orders
Order Cost
Holding Costs
Total Costs
1
Php 150
Php 600
Php 750
2
Php 300
Php 300
Php 600
3
Php 450
Php 200
Php 650
4
Php 600
Php 150
Php 750
5
Php 750
Php 120
Php 870
6
Php 900
Php 100
Php 1,000