Basic EOQ Model

The basic inventory decision model is Economic Order Quantity or called EOQ model. This model is specified via the following equation as:

Whereas:Q is the economic order quantity

               C_n is the cost of holding inventories per unit per order

               C_o is the cost of putting and obtains an order

               D is the annual demand in units

The net cost of operating the economic order quantity is specified via total ordering cost in additional total holding costs.

TC = ½QCn + ((D/Q) C₀)

Whereas: Total holding cost = ½QC_n

Total ordering cost = (D/Q) C₀

The holding costs involve as:

1. Storage costs
2. Cost of tied up capital
3. Obsolescence costs
4. Insurance costs

The ordering costs involve as:

1. Shipping and handling costs
2. Cost of placing orders such as telephone and clerical costs