EOQ mathematical model

As costs of ordering and holding stock are equal at the EOQ point, we can build a simple mathematical model to solve the problem, as follows:

(Q/ 2) X  H = (A/Q) X P
           
Here:
Q = EOQ
H = holding cost per unit
A = annual demand
P = cost of placing an order

Using the data in the previous example:

Although the model assumes that holding and ordering costs are fixed, this simplification is acceptable given a relatively unchanging level of production activity.  In addition, because the total cost curve in the figure is relatively flat either side of the EOQ, minor errors and approximation in the variables used in the calculation may not affect the end result significantly.

Practical constraints on the use of the model include restrictions on the available storage space, the availability of quantity discounts (though the model can be modified in this respect), the seasonal nature of supplies, the shelf-life of products and delivery schedules imposed by suppliers.