What is the EOQ formula?

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EOQ stand for economic order quantity. It is optimum level of order quality to be placed for procurement. It is derived by differentiating the formula of total cost comprises of holding cost and ordering cost.

If we operate at EOQ then total cost ( ordering cost + holding cost) will be minimum.

Formula is as under

EOQ = sqrt ( 2DS/IC)

D = annual demand

S= Cost per order

I = holding cost per unit as % of cost per unit

C= cost per unit.

EOQ formula is applicable under the following assumption

- Constant demand

- Constant lead time

- No quantity discount

An economic order quantity (EOQ) is an inventory-related equation that 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. The full equation is as follows:

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)