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

Differentiate between systematic and unsystematic risk, QUESTION a) Dis...

QUESTION a) Discuss the importance of diversification in the context of stock markets using appropriate numerical illustrations. b) Mimine and Minush are two companies with

Answer, Part B This case is intended to be an introduction to the various ...

Part B This case is intended to be an introduction to the various methods used in capital budgeting and looks at some of the decisions that may have to be made when evaluating pro

Ffnace management, What is the monthly interest rate if the lease payments ...

What is the monthly interest rate if the lease payments are $24,000 per month for 24 months. The total value is $420,000

Put, Put This is an agreement which is allowing a holder of privacies t...

Put This is an agreement which is allowing a holder of privacies to sell them back to the issuer at a specified amount during a specified time interval. This technique protects

Determine the investment to maximize the return, Assume that the treasurer ...

Assume that the treasurer of a company has an extra cash reserve of $1,000,000 to invest for six months. The six-month interest rate is 8% per year in the U.S. and 6% per year in G

Working of securities and exchange commission, Working of SEC The SEC s...

Working of SEC The SEC supervises the main members in the securities world, including securities brokers and dealers, securities exchanges, investment advisors, and mutual fund

Foreign exchange market, 'Foreign Exchange Market': Definition of 'For...

'Foreign Exchange Market': Definition of 'Foreign Exchange Market' The markets, in which participants are able to sell, buy exchange and speculate on currencies.  Foreign e

Explain discounting or present value concept, Q. Explain Discounting or Pre...

Q. Explain Discounting or Present Value Concept? Discounting or Present Value Concept: - According to this concept rupee one of today is more valuable than rupee one a year lat

Yield curve shift, The relative change in the yield for each treasury...

The relative change in the yield for each treasury maturity is known as a shift in the yield curve. When the change in the yield for all the maturities is same, t

Types of treasury bills, Types of Treasury Bills Treasury bills are iss...

Types of Treasury Bills Treasury bills are issued at various maturities, generally up to one year. Thus, they are useful in managing short-term liquidity. At present, the GOI (

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