Chapter 5 EOQ

Economic Order Quantity
 The EOQ Model determines the

optimal order size that minimizes total
inventory costs
Economic Order Quantity
 EOQ model applies to items that are:

 Replenished in batches or orders
 Not produced and delivered
instantaneously
 Only two costs are considered:
1. Carrying costs
2. Ordering costs
 Will decide
1. When to order
2. How many to order
Assumptions
1. Constant rate of demand
2. Shortages not allowed
3. Stock replenishment can be
scheduled to arrive exactly when
inventory drops to zero
4. Purchase price, ordering cost, and
per unit holding cost are
independent of quantity ordered
5. Items are ordered independently of
each other
Notation
EOQ= Economic order quantity in units

H = Holding (carrying) cost per unit
R = Demand, usually in units per year
I = Ordering cost
TC= Total Cost
C = Unit Price
Optimal Order Quantity
2RI = 2 (Annual Demand) (Order Cost)

EOQ=
H Annual Holding Cost per unit
EOQ
Length of order cycle =
(as fraction of a year) R
EOQ number of days in a year
Length of order cycle =
R
(as number of days)
*
# Orders / Year = R
EOQ
Basic EOQ Model
Annual Annual
Total cost = carrying + ordering
cost cost
EOQ R I
TC = H +
2 EOQ
Where: EOQ = Economic order quantity in units

H = Holding (carrying) cost per unit
R = Demand, usually in units per year
I = Ordering cost
Cost Minimization Goal
The Total-Cost Curve is U-Shaped

Annual Cost
Carrying Costs
Ordering Costs
EOQ (optimal order quantity) Order Quantity

(Q)
Cost Minimization Goal
According to the figure, the EOQ is
reached when ordering cost equals to
holding ( carrying) cost)
EOQ Example
A local office supply store expects to sell
392 printers next year. Annual carrying cost
is $5 per printer, and ordering cost is $20.
The company operates 300 days a year.
A) What is the EOQ?

B) How many times per year does the store reorder?
C) What is the length of an order cycle?
D) What is the total annual cost if the EOQ quantity is
ordered?
R 392
H 5
I 20
Working Days/Year 300
A) EOQ= 𝟐 ∗ 𝟑𝟗𝟐 ∗ 𝟐𝟎/𝟓

= 56
𝟑𝟗𝟐
B) # Orders / Year=
𝟓𝟔
=7
56
C) Length of order cycle (Year)=
392
=0.14
D) Length of order cycle (Days)= 300*0.14
=43
392 56
E) TC= ( *20 )+( *5)
56 2
= $280
Quantity Discounts
A price discount on an item if

predetermined numbers of units
are ordered
TC =
Carrying cost + Ordering cost + Purchasing cost =
(Q / 2) H + (R / Q) I + RC
where C = Unit Price

Quantity Discount Example
Campus Computers 2Go Inc. wants to reduce a large
stock of laptops it is discontinuing. It has offered the
University Bookstore a quantity discount pricing
schedule as shown below. Given the discount
schedule and its known costs, the bookstore wants to
determine if it should take advantage of this discount
or order the basic EOQ order size.
Quantity Price Carrying Cost: $200

70 – 99 $800 Ordering Cost $500
100 – 149 $600 Annual Demand 720 units
150 + $500 Basic Price $1,000
Quantity Discount Example
R 720 Q1 70 C1 800
H 200 Q2 100 C2 600
I 500 Q3 150 C3 500
C 1000
A) EOQ =60
=SQRT(2*720*500/200)
B) TC(EOQ) =(720*1000)+(720/60*500)+(60/2*200) =$732,000
C) TC(Q1) =$588,142.86
=(720*800)+(720/70*500)+(70/2*200)
D) TC(Q2) =$445,600
=(720*600)+(720/100*500)+(100/2*200)
E) TC(Q3) =$377,400
=(720*500)+(720/150*500)+(150/2*200)
F) # Orders / Year =4.8
=720/150
G) Length of order cycle =0.21

=150/720
Home Work #1
A local electronics store expects to sell 400
flat-screen TVs each month during next
year. Annual carrying cost is $20 per TV,
and ordering cost is $50. The company
operates 360 days a year.
A) What is the EOQ?
B) How many times per year does the store reorder?
C) What is the length of an order cycle?
D) What is the total annual cost if the EOQ quantity is
ordered?
Home Work #2
A mail-order house
# Boxes Unit Price
uses 18000 boxes
a year. Carrying 500-999 $125
costs are $ 50 per
box per year and 1000-1499 $120
ordering costs are
$86. The basic 1500+ $110
price is $140.
 1- What is the EOQ?
 2- How many times per year does the
company reorder?
 3- Which quantity the company must
buy to reduce the total cost?

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Economic Order Quantity

 The EOQ Model determines the

 EOQ model applies to items that are:

EOQ= Economic order quantity in units

2RI = 2 (Annual Demand) (Order Cost)

Where: EOQ = Economic order quantity in units

The Total-Cost Curve is U-Shaped

EOQ (optimal order quantity) Order Quantity

A) What is the EOQ?

A) EOQ= 𝟐 ∗ 𝟑𝟗𝟐 ∗ 𝟐𝟎/𝟓

A price discount on an item if

where C = Unit Price

Quantity Price Carrying Cost: $200

G) Length of order cycle =0.21

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