Explain economic order quantity, Financial Management

Q. Explain Economic Order Quantity?

Economic Order Quantity (EOQ):- Economic order quantity (EOQ) is that quantity of material for which each order must be placed. Purchasing large quantities at one time as well as keeping the same as stock and increases carrying cost of inventories but reducing ordering cost of inventories. Alternatively small orders reduce the average inventory level thereby reducing the carrying cost of inventories however increasing the ordering costs because of increased number of purchase orders. Thus determination of economic order quantity is a trade-off between two types of inventory costs:

(i) Ordering costs: - Ordering costs comprises costs of placing orders as well as cost of receiving delivery of goods such as clerical expenses in preparing a receiving expenses, purchase order, transportation expenses, inspection expenses and recording expenses of goods received.

(ii) Carrying Cost: - Carrying cost comprises costs of maintaining or carrying inventory such as insurance expenses, godown rent etc. These costs vary with inventory size.

The sum of ordering costs as well as carrying costs represents the total costs of inventory. Economic order quantity is that order quantity at which the total of ordering as well as carrying cost is minimum. Economic order quantity is able to be explained with the help of following diagram:

606_Explain Economic Order Quantity.png

Formula: - EOQ can be resolved by the following formula:

759_Explain Economic Order Quantity1.png

EOQ = Economic Order Quantity

R = Annual purchase Requirements in units

O = Ordering cost per order

C = Carrying cot per unit.

Posted Date: 8/6/2013 2:57:25 AM | Location : United States







Related Discussions:- Explain economic order quantity, Assignment Help, Ask Question on Explain economic order quantity, Get Answer, Expert's Help, Explain economic order quantity Discussions

Write discussion on Explain economic order quantity
Your posts are moderated
Related Questions
Ricardo Martinez has prepared the following financial statement projections as part of his business plan for starting the Martinez Products Corporation.  The venture is to manufact

A yield spread between any two bond issues can be easily computed when the maturity date for both these issues is same. The yield spread between these two bond

Question- Under a hire purchase deal structured by X Finance Ltd. for Y Corporation, the finance company has offered to finance the purchase of equipment that costs Rs. 200 lakh.

need to understand some basics of changes in working capital

Characteristics of a Stock Exchange The requirements for a stock exchange to act as a platform for buying and selling securities is dependant upon the trading prerequisites. Som

the stock of akpan ltd performs well during recessionary periods, and the stock of okon ltd does well during growth periods. both stocks are currently selling for Rs 100 per share

what are the features of branch accounting

(a) Let's presume that the firm may default only on last coupon payment date and that when this take place stock price would be less than some predetermined price K at the expira

What is Planning Internal auditors must plan the audit work so as to perform the audit in an effective manner.There must be sufficient audit programmes in existence which set o

What is the effect of stock (not cash) dividends and stock splits on the market price of common stock?  Why do corporations declare stock splits and stock dividends? Stock divi