Economic Order Quantity (EOQ) refers to the quantity of purchase of stocks or materials that minimizes the holding costs and the ordering costs. It is therefore the optimal ordering amount. It is computed as:
Where: D = Annual demand
Co = Cost of Ordering per unit
Ch = cost of holding one unit of stock per annum.
Assumptions behind EOQ:
Constant and known holding costs.
Constant and known ordering costs.
Annual demand and the rate of demand per given period of time is know.
Know and constant purchase price per unit.
Instantaneous replenishment of stocks i.e. a whole batch is delivered to stores at once.