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Definition – What is EOQ (Economic Order Quantity)?
EOQ is the ideal order quantity for a company to purchase.
It is based on the demand for an item, the cost to order it, and the cost to carry the item in inventory.
EOQ can be used in a number areas of business analysis, including reordering stock, and cash flow.
Formula – How to calculate EOQ
EOQ = √((2 x Demand x Ordering Cost) ÷ Carrying Costs)
Example
Product X has an annual demand of 5000 units. It costs $100 to make one order and $10 per unit to store the unit for a year.
EOQ = √((2 x 5000 x 100) ÷ 10)
EOQ = √(100000 ÷ 10)
EOQ = √100000
EOQ = 312
Therefore, the economic order quantity is 312 units per order.
Sources and more resources
- NC State University – Economic Order Quantity (EOQ) Model: Inventory Management Models: A Tutorial – Part of a larger tutorial, this page details how to calculate the economic order quantity.
- Wikipedia – Economic Order Quantity – An overview of what EOQ is and how it is calculated. Includes some example calculations.
- Investopedia – Economic Order Quantity – EOQ – A summary of EOQ and how to calculate it.
- INC Magazine – Economic Order Quantity (EOQ) – An introduction to EOQ.
- Dummies – Cost Accounting: The Economic Order Quantity – An explanation of the EOQ formula and some glossary definitions of the parts that make it up.