Explain about economic order quantity, Financial Management

Assignment Help:

Q. Explain about economic order quantity?

The economic order quantity (EOQ) model is basis on a cost function for holding inventory which has two terms: holding costs as well as ordering costs. Through the EOQ the total cost of having inventory is minimised when holding cost is equal to ordering cost. The EOQ model presumes certain knowledge of the variables on which it depends and for this reason is called a deterministic model. Demand for inventory holding cost per unit per year as well as order cost are assumed to be certain and constant for the period under consideration. In practice demand is probable to be variable or irregular and costs will not remain constant. The EOQ model as well ignores the cost of running out of inventory (stockouts). This has reason some to suggest that the EOQ model has little to recommend it as a practical model for the management of inventory.

The model was developed on the foundation of zero lead time and no buffer stock but these aren't difficulties that prevent the practical application of the EOQ model. As our previous analysis has shown the EOQ model is able to be used in circumstances where buffer stock exists and provided that lead time is known with certainty it can be ignored.

The EOQ model as well serves a useful purpose in directing attention towards the costs that arise from holding inventory. If these costs are able to be reduced working capital tied up in inventory is able to be reduced and overall profitability can be increased.

If uncertainty subsist in terms of demand or lead time, a more complex inventory management model using probabilities (a stochastic model) such as the Miller-Orr model can be used. This model computes control limits that give guidance as to when an order must be placed.


Related Discussions:- Explain about economic order quantity

What is exit strategy, Exit strategy Venture capitalists and other fina...

Exit strategy Venture capitalists and other financiers will negotiate an exit strategy at the point of advancing the money. The exit strategy will involve them realising their

Assignment, 1. If Robinson wishes to maximize its total market value, would...

1. If Robinson wishes to maximize its total market value, would you recommend that it issue debt or equity to finance the land purchase? Explain. 2. Construct Robinson’s market va

Forms of dividend, FORMS OF DIVIDEND Cash Dividend Many Companies...

FORMS OF DIVIDEND Cash Dividend Many Companies pay dividend in cash. Often cash dividend may be supplemented by a bonus issue (stock dividend).  When the company chooses

Financial algebra, can you help me subtract checks and balances in financia...

can you help me subtract checks and balances in financial algebra

Value index numbers, Value Index Numbers The value index number as desc...

Value Index Numbers The value index number as described earlier is a combination index which combines price and quantity changes. Because of the difficulties experienced in pri

Evaluate the strength of the human development, In 2005, Mr. Gordon Brown's...

In 2005, Mr. Gordon Brown's brought up a plan of action to help reduce poverty and boost economic development in Africa. The three essential elements of the 2005 development plan

Financial plan development, You need to tick all the boxes below to acknowl...

You need to tick all the boxes below to acknowledge that your Statement of Advice complies will all the requirements. This checklist needs to be appended to the cover sheet of the

Explain the divestment of company re-organisations, Divestment of company r...

Divestment of company re-organisations Adisinvestment or divestment is selling part of the business or subsidiary to another third party. Reasons and features for divestme

Blade inc case study, what are the advantages blades could gain from import...

what are the advantages blades could gain from importing or exporting to a foreign country such azs thailand?

Financial analysis, are footnotes important in analysing ratios

are footnotes important in analysing ratios

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd