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Nov 27, 2023

How to calculate economic order quantity?

Business finance
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Nov 27, 2023
To calculate the economic order quantity (EOQ), you need to follow these steps:

1. Determine the demand: Determine the annual demand for the product in units. This can be based on historical sales data or forecasts.

2. Determine the ordering cost: Calculate the cost of placing an order, including administrative costs, transportation costs, and any other relevant expenses.

3. Determine the holding cost: Calculate the cost of holding one unit of inventory for a year. This includes costs such as storage, insurance, obsolescence, and opportunity cost of tying up capital.

4. Calculate the EOQ formula: Use the following formula to calculate the EOQ:
EOQ = √((2 * demand * ordering cost) / holding cost)

5. Interpret the result: The EOQ represents the optimal order quantity that minimizes the total cost of inventory management. It indicates the quantity that should be ordered each time to balance the costs of ordering and holding inventory.

Note: The EOQ assumes that demand is constant and known, ordering and holding costs are fixed, and there are no quantity discounts or constraints.
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