EOQ – Concept & Definition – Digital E-filing Coach

Economic Order Quantity (EOQ) – Study Resource

1. EOQ – Definition & Concept

1.1 Meaning of EOQ

Economic Order Quantity (EOQ) is the quantity of inventory to be ordered at one time that minimises the total of ordering cost and carrying (holding) cost of inventory over a period, normally one year.

1.2 Assumptions of EOQ

Demand is known, constant and uniform throughout the year.
Lead time is constant.
Purchase price, ordering cost and carrying cost are constant.
No stock-out is allowed and replenishment is instantaneous.

2. Advantages of EOQ

Sl. No.	Advantage	Explanation
1	Minimises total inventory cost	Balances ordering cost and carrying cost at their lowest combined level.
2	Improves cash flow	Avoids over-stocking and unnecessary blocking of working capital.
3	Reduces stock-out risk	Planned ordering reduces the possibility of stock shortage.
4	Supports planning	Helps in scheduling purchase and production activities efficiently.
5	Simple and practical	Uses a basic formula and can be easily applied in many organisations.

3. EOQ Formula & Variables

Standard EOQ formula:

EOQ = √((2 × D × Co) / Ch)

Symbol	Meaning	Units
D	Annual demand / usage	Units per year
Co	Ordering cost per order	₹ per order
Ch	Carrying (holding) cost per unit per year	₹ per unit per year
EOQ	Economic Order Quantity	Units per order

4. Steps & Flowchart for EOQ Calculation

4.1 Step-wise Procedure

Identify annual demand (D), ordering cost per order (Co) and carrying cost per unit per year (Ch).
Apply the formula EOQ = √((2 × D × Co) / Ch).
Calculate the numerator: 2 × D × Co.
Divide the numerator by Ch.
Take the square root to obtain EOQ.
Round EOQ to the nearest whole unit.

4.2 Simple Vertical Flowchart

Start

Identify D, Co, Ch

Compute 2 × D × Co

Divide by Ch

Take square root → EOQ

Round EOQ and use for planning

End

5. EOQ – Solved Problems

Problem 1

D = 10,000 units per year, Co = ₹ 200 per order, Ch = ₹ 10 per unit per year.

EOQ = √((2 × 10,000 × 200) / 10) ≈ 632 units (approximately).

Problem 2

D = 4,800 units per year, Co = ₹ 120 per order, Ch = ₹ 15 per unit per year.

EOQ = √((2 × 4,800 × 120) / 15) ≈ 277 units (approximately).

Problem 3

D = 36,000 units per year, Co = ₹ 250 per order, Ch = ₹ 20 per unit per year.

EOQ = √((2 × 36,000 × 250) / 20) ≈ 950 units (approximately).

6. Exam Questions & Answers

6.1 Five-mark Questions (Short Model Answers)

Define EOQ and explain its assumptions.
Explain the advantages of EOQ in inventory management.
Derive the EOQ formula and explain each symbol.
Calculate EOQ and number of orders given D, Co and Ch.
Discuss the limitations of the EOQ model.

6.2 Three-mark Questions

State any three assumptions of EOQ.
Distinguish between ordering cost and carrying cost (any three points).
What is meant by minimum total inventory cost?
Why is the square root used in the EOQ formula?
What happens to EOQ when annual demand doubles?

6.3 Two-mark Questions

Give the full form of EOQ and write its formula.
What is ordering cost? Give two examples.
What is carrying cost?
Name any two factors affecting EOQ.
State one objective of EOQ.

7. EOQ Mind Map (Text-based)

Use this structure to draw a neat diagram in your notebook.

EOQ
- Concept & Definition
  - Optimal order size
  - Minimises total cost
- Assumptions
  - Constant demand
  - Constant lead time
  - Constant price and costs
  - No stock-out
- Inputs / Data
  - D: Annual demand
  - Co: Ordering cost
  - Ch: Carrying cost
- Formula
  - EOQ = √((2 × D × Co) / Ch)
- Advantages
  - Lower total cost
  - Better planning
  - Reduced stock-out risk
- Limitations
  - Unrealistic assumptions
  - Ignores quantity discounts
  - Not suitable for highly variable demand