Economic order quantity

Economic order quantity:-

A firm should not place either too large or too small orders. On the basis of a trade-off between benefits derived from the availability of inventory and the cost of carrying that level of inventory, the appropriate or optimum level of the order to be placed should be determined. The optimum level of inventory is popularly referred to as the economic order quantity (EOQ). It is also known as economic lot size.

The economic order quantity may be defined as that level of inventory order that minimizes the total cost associated with inventory management. I.e. it refers to the level of inventory at which the total cost of inventory comprising acquisition/ordering/set-up costs and carrying cost is minimal.

EOQ = / C

[

A = Total annual requirement

O = Ordering cost per order

C = Convey in cost per unit