Economic Order Quantity-basics
Jaromír Skorkovský
Department of corporate economy

EOQ 1
•EOQ = Economic Order Quantity and limitation of this model
•EQO = Deterministic model
•Variables  used to derive  EOQ basic formula (see slide EOQ5)
–Ch = Cost to hold one unit inventory for a year
–Cp = Cost to place a single order
–  A = Demand for the year
–  Q = Quantity of orders
–
•The economic order quantity (EOQ) is the order quantity that minimizes total holding and ordering
costs for the year. Even if all the assumptions don’t hold exactly, the EOQ gives us a good
indication of whether or not current order quantities are reasonable.
•  Total Relevant Cost (TRC)
–    why relevant ? ->because they are affected by order quantity
•  TRC= Yearly Holding Cost + Yearly Ordering Cost
•
Average inventory carrying cost –see EOQ4  slide

EOQ 2
•What is the EOQ Model?
•Cost Minimizing  Order Quantity (Q)
•Assumptions=prerequisites:
–Single item only
–Relatively uniform (continuous) & known demand rate
–Fixed item cost
–Fixed ordering and holding cost
–No stock shortage and  Instantaneous shipment
–
•Constant lead time =LT (see slide EOQ3)
•

•
•
EOQ 3
A
Q = Quantity
LT
A
LT
time
Notice, that inventory never goes below zero; shortages do not exist !!

 EOQ4 -  Carrying cost
5
•Resource- Taylor- Wikipedia
To verify this relationship, we can specify any number of points values of Q over the entire time
period, t , and divide by the number of points. For example, if Q = 5,000, the six points
designated from 5,000 to 0, as shown in shown figure, are summed and divided by 6:

EOQ 5
•EOQ
To calculate derivative of TRC and put it to 0
dTRC/dQ=0=Ch/2+(A*Cp)/(Q*Q)-> Q=
TRC=

EOQ 6 – simpe example
•EOQ
* Pam runs a mail-order business for gym equipment. Annual demand for the TricoFlexers is 16,000.
The annual holding cost per unit is $2.50 and the cost to place an order is $50. What is the
economic order quantity?
*
Ch = Cost to hold one unit inventory for a year
Cp = Cost to place a single order
  A = Demand for the year
  Q = Quantity of orders

•EOQ