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The Economic Order Quantity (EOQ) formula: EOQ = √(2DS)/H where:
EOQ CalculatorEconomic Order Quantity (EOQ) is a formula that helps businesses determine the ideal order quantity of inventory to minimize costs and maximize profits. The Economic Order Quantity formula takes into account two major costs associated with inventory management – the cost of ordering inventory and the cost of holding inventory. To understand the Economic Order Quantity formula better, let’s take an example of a retail store that sells a particular product. Let’s assume that the annual demand for this product is 10,000 units, the cost of placing an order is $200, and the holding cost per unit per year is $10. |
Economic Order Quantity (EOQ) = √[(2DS)/H]
Using the EOQ formula, we can calculate the ideal order quantity as follows:
EOQ = sqrt(2DS/H) where: D = Annual demand for the product = 10,000 units S = Cost per order = $200 H = Holding cost per unit per year = $10
Plugging in the values, we get: EOQ = sqrt(210,000200/10) = sqrt(40,000) = 200
This means that the retail store should place an order for 200 units of the product at a time to minimize ordering and holding costs.
If the store were to order fewer units at a time, the ordering cost per unit would increase, resulting in higher overall costs. On the other hand, if the store were to order more units at a time, the holding cost per unit would increase, resulting in higher overall costs as well.
By using the EOQ formula, businesses can optimize their inventory management and reduce costs while ensuring that they have enough inventory to meet customer demand. This can lead to increased profitability and long-term success.