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We use economic order quanity (EOQ) farmula in order to find the inventroy level at which ordering cost and carryig cost is minimum.
EOQ = Under root of (2CoD/Ch)
where is , Co = Ordering Cost per order
D = Demand, Ch = Holding cost of single unit
Related to: Inventory Control/Costing
When an Industrial unit/Dealership have bulk requirements for business of comparatively lesser value per unit and non-perishable items a comparative study is made on:
1.Ordering Cost and2. Holding Cost in terms of a certain period (say1 year)
1. Ordering Cost means: Here approximate No.of orders is Ascertained based on EOQ and cost per Order is ascertained to sum up for total orders for the year (In case of imports irrespective of Quantity of items order, A fixed cost is inherent to all transactions for opening LCs/Customs etc.)
2. Holding Cost on the other hand is the ascertainment holding the stock as Inventory for the entire period under consideration and includes all direct and indirect and notional expenses connected to hold the Stock.
Based con comparison these two Optimum Level of stock can be determined.
Agreed with colleagues answers
