Definition: Economic Order Quantity (EOQ)
Economic order quantity (EOQ) is the quantity of a product that should be ordered so as to minimize the total cost that includes ordering costs and inventory holding costs.The basic model of EOQ gives the equation to calculate EOQ as follows,
A Working Example
The video above explains the following example in detail. However, to simplify the calculation, we'll review each step in detail.
- Annual or Yearly Consumption: 3000 units
- Price Paid Each Unit: $20.00
- Cost to Purchase: $2.00
- Inventory Holding Cost Percentage: 3%
From the
above example, the company's EOQ would be 141 units. Given that the
company purchases 3000 units a year, it will then make 21 separate
purchases of 141 units at a time. This is simply the 3000 units divided
by the EOQ of 141.
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