How to Use EOQ Calculator
Enter the Units demanded per year.
Enter the fixed cost per order.
Enter the holding cost per item
How to calculate Economic Order Quantity
Economic Order Quantity Formula
: Square Root Of (2 x Demand Amount x Order Cost)/(Holding cost per unit)
A company that sells premium water bottles, each bottle costs $20. We want to make sure our inventory costs are as little as possible. To calculate the EOQ there are a few things we need.
- The demand for the bottles 5,000 a month.
- The cost of placing the order is $5.
- The cost of holding a bottle in inventory per month is $3.
Using the formula we can calculate the EOQ, Square root of ((2 x 5000 x 5) / (3)) = 129.099. If we round down 129 is the optimal number of bottles to purchase for each order.
A company is selling basketballs sponsored by Michael Jordan.
- Each basketball costs $40.
- The cost of placing an order is $100.
- The holding cost is $10 per basketball per month.
- The demand is 12,000 basketballs per month.
Using the formula we can calculate the EOQ, Square root of ((2 x 12000 x 100) / (10)) = 489.897948557. If we round up, 489 is the optimal number of basketballs to purchase for each order.
Definition: Economic Order Quantity (EOQ) is a formula for inventory used to calculate the optimal amount a company should purchase for its inventory.
Inventory Mangement is an important aspect of any business that holds inventory. Inventory costs can become quite expensive, needing to be reduced whenever possible while also ensuring there is enough inventory to operate with until the next order is completed. If a company runs out of inventory it often leads to losing customers.
EOQ is a method used to determine if the size of current orders are acceptable. It can minimize inventory costs by making sure the orders are not overblown which in turn makes the whole inventory process more efficient.
The total cost of holding inventory can range from renting a warehouse, salaries for people that maintain the inventory, utilities. To the financial costs such as inventory going out of date, opportunity cost and insurance.
One way to decrease Inventory cost is to make more inventory orders with less quantity per order. Although if you increase the number of orders that generally means more transactions and an increase in shipping costs.
If the shipping cost increase is bigger then the amount saved from having less inventory, it is increasing the total inventory cost. To calculate how much an order costs we need to know how many units are ordered, the fixed cost per order and the demand.
There are some assumptions made when calculating the Economic order quantity.
- Ordering cost: The cost per order purchased. EOQ makes the assumption that each order is the same quantity.
- Cost Per Unit: The cost per unit does not change, staying the same for each order, regardless of season or quantity.
- Demand: The demand needed for a product in a certain time period.
- Holding Cost: The cost of storing your extra stock during the time period does not change.
While every assumption made may not be exactly right, the demand rate may change, ordering costs can fluctuate or a new landlord may increase rent where you store your products. The EOQ gives a good indication of future orders and if the order quantities are acceptable.
The Economic Order Quantity is designed to provide a way for companies to find the ideal order amount, doing this helps in minimizing the cost of both ordering and holding inventory. As when the quantity of each order increases the cost of ordering products decreases but as the ordering price falls, holding inventory increases. EOQ is designed to find the best middle ground and minimize both or these costs.