Example
- Suppose annual requirement quantity (Q) = 10000 units
- Cost per order (CO) = $2
- Cost per unit (CU)= $8
- Carrying cost %age (%age of CU) = 0.02
- Carrying cost Per unit = $0.16
Economic order quantity =
Economic order quantity = 500 units
Number of order per year (based on EOQ)
Number of order per year (based on EOQ) =
Total cost
Total cost
Total cost
If we check the total cost for any order quantity other than 500(=EOQ), we will see that the cost is higher. For instance, supposing 600 units per order, then
Total cost
Total cost
Similarly, if we choose 300 for the order quantity then
Total cost
Total cost
This illustrates that the Economic Order Quantity is always in the best interests of the entity.
Read more about this topic: Economic Order Quantity
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