Economic Order Quantity

This constitutes the quantity purchased of either raw materials or stocks which is considered most optimum. It is the quantity such minimizes both ordering costs and holding costs, like the quantity of purchase rises there is a reduction in ordering costs, however a raise in holding costs as demonstrate in the graph below as:

Net cost = Net ordering costs + Net holding costs

Net ordering costs = cost per order X no of orders in a period

Net holding cost = average stock quantity X holding cost per unit