How to Calculate Economic Order Quantity and Annual Ordering Cost
What is the Economic Order Quantity (EOQ) and how do you calculate it?
Given the annual demand for an item is 12,000 units, the ordering cost is $80 per order, and the carrying cost is 20% of the unit cost of $15.
What is the formula to determine the EOQ?
Based on the data, how can we calculate the Annual Ordering Cost?
Economic Order Quantity (EOQ) Calculation:
The Economic Order Quantity (EOQ) is approximately 800 units.
Formula for EOQ:
EOQ = √((2 * Annual Demand * Ordering Cost) / Carrying Cost per Unit)
Calculation for Annual Ordering Cost:
The Annual Ordering Cost is $1,200.
The Economic Order Quantity (EOQ) is a formula used in inventory management to determine the optimal order quantity that minimizes total inventory costs.
The formula for calculating EOQ is:
EOQ = √((2 * Annual Demand * Ordering Cost) / Carrying Cost per Unit)
Given the data:
- Annual Demand = 12,000 units
- Ordering Cost = $80 per order
- Carrying Cost = 20% of Unit Cost = 0.20 * $15 = $3
Substitute these values into the formula:
EOQ = √((2 * 12,000 * $80) / ($3))
EOQ = √(1,920,000 / 3)
EOQ ≈ 800 units
Therefore, the Economic Order Quantity (EOQ) is approximately 800 units.
To calculate the Annual Ordering Cost, divide the Annual Demand by the EOQ and then multiply it by the Ordering Cost:
Annual Ordering Cost = (12,000 / 800) * $80 = $1,200
Thus, the Annual Ordering Cost is $1,200.