EOQ-Economic order quantity

EOQ  is that quantity to be purchased per order at which the aggregate of ordering and carrying cost is minimum. In other words, EOQ is the quantity of materials to be purchased at a time, in order to optimize the cost there on.

 EOQ= √2CO / I 

Where, C=consumption of the material per annum (in unit or amount)

O=ordering cost per order

I=inventory carrying cost of 1 unit of material for one year. 

Ordering cost:- all the cost incurred by the entity right from receiving the purchase requisition until the materials received by the stock keeper and placed the inventory at its appropriate place in the store. This cost include the cost of receiving and processing the quotation, cost of placing orders, inward transportation cost, transit insurance, loading charges, unloading charges, material inspection changes etc. This cost vary in direct proportion to the number of orders placed. 

Carrying cost:- “cost of holding materials in the store right from placing the inventory in the store until it is issued to the production centre for processing.” This cost include, cost of operating the store or warehouse such as salary, rent, lighting and heating charges, godown insurance charges, interest on capital, obsolescence  of material and wastage of material. 

At EOQ:

• ordering cost=carrying cost
• ordering cost+ carrying cost is minimum 

• Number of orders to be placed in an year at EOQ = C/EOQ – where C = Consumption of material per annum
• Annual ordering cost= O x no. of order per annum
• Annual carrying cost=EOQ/2xI
• Total cost of inventory per annum
• invoice price per year (+)
• annual ordering cost(+)
• annual carrying cost

(Q.1) calculate EOQ from the following information

(i) Consumption of the material per annum-6000 units

(ii) Ordering cost per order-Rs.15

• cost per unit of material-Rs.2.50
• Inventory carrying cost is 20% of average inventory.  

EOQ=√2CO / I

 c=6000,  O =₹15 I=2.5x20/100       =          ₹0.5 

EOQ =  600 Units

Thanks!