EOQ

Economic Order Quantity (EOQ) - Complete Educational Study Material

Fixation of Economic Order Quantity (EOQ)

Complete Educational Study Material with Examples, Problems, Questions & Mind Map

📑 Table of Contents (Click to Jump)

1. Definition of Economic Order Quantity (EOQ)

Economic Order Quantity (EOQ) is the ideal order quantity a company should purchase to minimize the total inventory costs, which include ordering costs and holding (carrying) costs.

It is one of the oldest classical production scheduling models, developed by Ford W. Harris in 1913.

EOQ = Optimal quantity that minimizes total inventory cost

2. Advantages of Using EOQ Model

AdvantageExplanation
Minimizes Total CostBalances ordering and holding costs
Reduces StockoutsEnsures material availability
Lowers Holding CostAvoids excess inventory
Improves Cash FlowLess money tied up in inventory
Better Supplier RelationsRegular ordering pattern

3. EOQ Formula & Assumptions

EOQ = √(2 × D × S / H)

Where:

SymbolMeaningUnit
DAnnual DemandUnits/year
SOrdering Cost per order₹ or $ per order
HHolding Cost per unit per year₹ or $ per unit/year

Key Assumptions of EOQ Model

  • Demand is constant and known
  • Lead time is zero or constant
  • No quantity discounts
  • Instantaneous replenishment
  • Holding cost is proportional to inventory level

4. EOQ Decision Flowchart

Start → Collect D, S, H → Calculate EOQ = √(2DS/H) → Place order of EOQ size → Reorder when stock = 0 → Repeat

    +------------------+
    |   Start          |
    +--------+---------+
             ↓
    +--------+---------+
    | Collect Data:    |
    | D, S, H          |
    +--------+---------+
             ↓
    +--------+---------+
    | Calculate EOQ    |
    | √(2DS/H)         |
    +--------+---------+
             ↓
    +--------+---------+
    | Place Order      |
    | of EOQ size      |
    +--------+---------+
             ↓
    +--------+---------+
    | Stock reaches 0  |
    | → Reorder        |
    +--------+---------+
             ↓
    +--------+---------+
    |     End          |
    +------------------+

5. Solved Numerical Problems on EOQ

Example 1 (Basic)

Annual demand = 4800 units, Ordering cost = ₹150/order, Holding cost = ₹20/unit/year

Solution:
EOQ = √(2 × 4800 × 150 / 20) = √(1440000 / 20) = √72000 = 268 units (approx)

Example 2

D = 10000 units, S = ₹400, H = ₹50/unit/year

EOQ = √(2×10000×400 / 50) = √(8000000 / 50) = √160000 = 400 units

Example 3

A company uses 12000 kg of raw material. Ordering cost ₹250 per order, holding cost 15% of average inventory value. Price ₹40/kg.

H = 15% × 40 = ₹6/kg/year
EOQ = √(2×12000×250 / 6) = √(6000000/6) = √1000000 = 1000 kg

6. 15 Practice Questions with Answers

5 Marks Questions (5 Nos)

  1. Explain the concept of EOQ with its assumptions and limitations.
    Ans: Detailed explanation (as above) + limitations: constant demand, no discounts, etc.
  2. Derive the EOQ formula mathematically.
    Ans: Total cost = (D/Q)S + (Q/2)H → dTC/dQ = 0 → Q = √(2DS/H)
  3. A company has annual demand 24000 units, ordering cost ₹300, holding cost ₹24/unit/year. Find EOQ, number of orders, and total cost.
    Ans: EOQ=1000 units, Orders=24, Total cost=₹24000
  4. Explain advantages and disadvantages of EOQ model.
  5. Draw and explain inventory level diagram under EOQ model.

3 Marks Questions (5 Nos)

  1. Define EOQ and write its formula.
  2. State any six assumptions of EOQ.
  3. If D=6000, S=₹200, H=₹10, find EOQ. → 490 units approx
  4. What is the significance of EOQ?
  5. Differentiate between ordering cost and carrying cost.

2 Marks Questions (5 Nos)

  1. Who developed EOQ model? → Ford W. Harris (1913)
  2. Write EOQ formula.
  3. If EOQ increases, what happens to holding cost? → Increases
  4. EOQ is the point where _____ cost = _____ cost. → Ordering = Holding
  5. Holding cost is also known as _____ cost. → Carrying cost

7. EOQ Mind Map (Text-Based Non-Overlapping)

                             ECONOMIC ORDER QUANTITY (EOQ)
                                           │
             ┌───────────────────────────┼────────────────────────────┐
             │                           │                            │
        Definition                Advantages                     Formula
    Ideal order size             Minimizes total cost           EOQ = √(2DS/H)
    Balances costs               Reduces stockouts              D = Demand
    Developed by Harris 1913      Improves cash flow             S = Ordering cost
                                           │                      H = Holding cost
             │                           │                            │
        Assumptions                Components                Solved Problems
    • Constant demand             • Ordering Cost                Example 1 → 268 units
    • No discounts                • Holding Cost                 Example 2 → 400 units
    • Instant receipt             • Total Cost = (D/Q)S + (Q/2)H  Example 3 → 1000 kg
                                           │
                                    Optimal Point
                             Ordering Cost = Holding Cost

This resource is for educational purposes only and does not constitute legal or professional advice.

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