EOQ determines the 'optimum order quantity' that a company should hold in its inventory given a set cost of production, demand rate and other variables. This is done to minimize variable inventory costs.
Economic Order Quantity (EOQ)= Square root of (2SD/ PI)
where : S = Setup costs D = Demand rate P = Production cost I = Interest rate (considered an opportunity cost, so the risk-free rate can be used)
25 January 2011
EOQ is Economic Order Quantity which is the optimum quantity which should be ordered so as to minimise ordering cost and holding cost of the inventory.
EOQ = Square root of (2CO/UI)
C=annual consumption O=ordering cost UI=carrying cost per unit
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