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Economic Order
Quantity
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Economic Order Quantity is the level of inventory that

minimizes the total inventory holding costs and ordering
costs. It is one of the oldest classical production scheduling
models. Economic order quantity refers to that number
(quantity) ordered in a single purchase so that the 2
accumulated costs of ordering and carrying costs are at the
minimum level. In other words, the quantity that is ordered
at one time should be so, which will minimize the total
 of. Cost of placing orders and receiving the goods, and Cost
of storing the goods as well as interest on the capital
invested.

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The economic order quantity can be determined by the
following simple formula:

Formula

EOQ = Economic Order Quantity,

RU = Annual Required Units,

OC = Ordering Cost for one Unit

UC = Inventory Unit Cost,

CC = Carrying Cost as %age of Unit Cost

>>> Practice Economic Order Quantity Problems 2

and Solutions.
 Video Lecture: Costing
Concepts in Urdu &
Hindi-Workbook Practice

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Lecture 6 (Part 2): Economic Order…

Order…

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Example 1:
Demand for the Child Cycle at Best Buy is 500 units per 2
month. Best Buy incurs a fixed order placement,
transportation, and receiving cost of Rs. 4,000 each time an
order is placed. Each cycle costs Rs. 500 and the retailer
 has a holding cost of 20 percent. Evaluate the number of
computers that the store manager should order in each
replenishment lot?

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>> Practice Economic Order Quantity Problems and 2

Solutions.
Example 2:
ABC Ltd. uses EOQ logic to determine the order quantity
for its various components and is planning its orders. The
Annual consumption is 80,000 units, Cost to place one
order is Rs. 1,200, Cost per unit is Rs. 50 and carrying cost
is 6% of Unit cost. Find EOQ, No. of order per year,
Ordering Cost and Carrying Cost and Total Cost of
Inventory.

2
>> Question and Answers: Economic Order 2
Quantity Problems and Solutions
Example 3:
Midwest Precision Control Corporation is trying to decide
between two alternate Order Plans for its inventory of a
certain item. Irrespective of the plan to be followed,
demand for the item is expected to be 1,000 units annually.
st
Under Plan 1 , Midwest would use a teletype for ordering;
order costs would be Rs. 40 per order. Inventory holding
costs (carrying cost) would be Rs. 100 per unit per annum.
nd
Under Plan 2 order costs would be Rs. 30 per order. And
holding costs would 20% and unit Cost is Rs. 480. Find out
EOQ and Total Inventory Cost than decide which Plan
would result in the lowest total inventory cost?

2
>> Practice Economic Order Quantity Problems and
Solutions.
2
Example 4:
A local TV repairs shop uses 36,000 units of a part each
year (A maximum consumption of 100 units per working
day). It costs Rs. 20 to place and receive an order. The shop
orders in lots of 400 units. It cost Rs. 4 to carry one unit per
year of inventory.

Requirements:

(1) Calculate total annual ordering cost

(2) Calculate total annual carrying cost

(3) Calculate total annual inventory cost

(4) Calculate the Economic Order Quantity

(5) Calculate the total annual cost inventory cost using EOQ
inventory Policy

(6) How much save using EOQ 2

(7) Compute ordering point assuming the lead time is 3
days
 >> Practice Economic Order Quantity Problems and 2
Solutions.

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Related Topics
Inventory Management

Inventory Management MCQs

Inventory Management Problems

Economic Order Quantity MCQ

Economic Order Quantity Problems

More Interest
Labor Cost
2
Payroll Systems

Labor Cost MCQs

Labor Cost Problems

Inventory Valuation

Further Readings
Cost Accounting

Cost Accounting MCQs

Cost Accounting Problems

Cost Accounting Papers

Cost Accounting Workbook

References
Mukharji, A., & Hanif, M. (2003). Financial Accounting (Vol. 1).
New Delhi: Tata McGraw-Hill Publishing Co.
2
Narayanswami, R. (2008). Financial Accounting: A Managerial
Perspective. (3rd, Ed.) New Delhi: Prentice Hall of India.
Sponsored by
Open
www.infomigrants.net

Ramchandran, N., & Kakani, R. K. (2007). Financial

Accounting for Management. (2nd, Ed.) New Delhi: Tata
McGraw Hill.

40 Comments
2
Samuel minda on July 22, 2022 at 10:52 am
I asked question if u can n if u free please help me

Reply
Samuel on July 22, 2022 at 10:23 am
Horizon campany makes and sells specially gear for
the retail automobile after market. The has
estimated the annual demand for a component
(gear) is 1000 units next year, with an average daily
demand production most efficient at 8 units per a
day. In connection with production , the Experience
of the company shows that the set up cost is 10 per
order and the holding cost is birr 0.50 per gear per
year. (Note; there are 250 working days in a year).
1,what is Economic order quantity?
2,How many production runs will be made per
year?
3,What will be the maximum inventory levele?
4,The time gap between two production run is
5,How many days take a single production run to
be finished?
6,For how many days in the year the production
unit will be idle?
7,Total minimum Stocking cost of the Company is??
8, At break event point???

Reply

2
chinky on May 21, 2022 at 7:37 am
Please help me in this question ASAP

You are a manufacturer of tennis balls in the

Mumbai Suburbs. Recently, you got an
order to supply 1200 units of the same on a
monthly basis. The cost of carrying an
inventory of such tennis balls is 1.80 per unit on
yearly basis. The production process
requires a setup cost on a per run basis of Rs 1000.

Compute:
a. The EOQ, and define the need of computing the
EOQ
b. The Optimum number of orders and optimum
period of supply

Reply

chinky on May 21, 2022 at 7:33 am

From the following information provided by Alfa
Manufacturing Ltd, prepare a
statement of equivalent units.

Particulars Quantity

Opening stock of inventory

(60 percent complete) – 500

Units introduced during the year – 10000

2
Closing inventory of stock
(completion percentage, 40% complete)- 200

Reply
Maha on December 2, 2021 at 12:16 pm
2. Following information relating to a type of raw
material is available: Annual demand 2,400 units
Unit price​RO 2,400
Ordering cost per order RO .400
Storage cost: 2 % per annum
Interest rate: 10% per annum
Calculate EOQ and the number of orders that are
required to be placed during the year.

Reply

MWABAYA MICHAEL KAMBI on May 7,

2022 at 1:34 pm
EOQ=√((2×2400×400)/(2%×10%)
= 30984

Reply

Obuh Victor on August 29, 2021 at 7:46 pm

A car manufacturing company produces 450 cars in
one month. It buys the engines for cars from a
supplier at a cost of ₦20 per engine. The company’s
2
inventory carrying cost is estimated to be 15% of
cost and the ordering is ₦50 per order. You are
required to:

i. Compute the average annual ordering cost.

ii. Compute the average inventory

Please assist me with a solution to this question

Reply

intrepid on September 4, 2021 at 4:44 am

i) EOQ= √(2×5400×50)÷3

EOQ=424 units

ii) Average Inventory=EOQ/2

=424/2= 212 units

Reply

MWABAYA MICHAEL KAMBI on May 7,

2022 at 1:37 pm
Ordering cost= no.orders×max quantity
=20×450(12)
= 108,000

Reply
2

mk on July 22, 2021 at 12:27 pm

I. Calculate the Economic Order Quantity and
number of orders to be placed in a year for tablet
clarithromycin 500 mg used in a tertiary car,e
center.

Annual consumption of tablet clarithromycin 500

mg is 470 no. and it is usually purchased at the cost
of Rs. 150 (tab 4s). The buying cost per order is Rs.
170. Its carrying and storage cost is Rs. 112.

Can you please help me

Reply

saqib Ali on July 18, 2021 at 11:13 am

The Florida company has obtained the following
costs and other data pertaining to one of its
materials:
Workign days per year 250
Normal use per day 500 units
Max. use per day 600 units
Min. use per day 100 units
Lead time 5 days
variable cost of placing one order $ 36
variable carrying cost per unit per year $ 1

Required: 2
a) Economic Order Quantity

b) Safety Stock

c) Order Point
 Reply

JAIVING G. WISKI on June 30, 2021 at 10:47 am

sorry may you help me that question;

1. An item has a monthly demand of 2500 units and

each item costs $ 10.00 to purchase it. the cost of
placing order per unit is $ 10.00 while holding cost
are estimated to be 2% of the stock value. if the
organization works for 10 months in a year.
calculate the followings
(a) Economic Order Quantity
(b) number of orders costs
(c) total ordering cost
(d) average inventory level
(c) the re-order point if lead time 5 days

Reply

AMANI PETRO on July 28, 2022 at 10:40 am

Why economic order quantity does not have
quantity discount? 2
Reply

Banda Edward on June 4, 2021 at 12:34 am

Can anybody help with solutions to the following
questions?

Problem 1:
A large firm uses an average of 40 boxes of copier
paper a day. The firm operates 260 days per year.
Storage and handling costs for the paper are $30 a
year per box, and it costs approximately $60 to
order and receive a shipment of paper.
a) What order size would minimize the sum of
annual ordering and carrying cost?
b) Compute the total annual cost using your order
size from part a.
c) The office manager is currently using an order
size of 200 boxes. The partners of the firm expect
the office to be managed ‘in a cost-efficient
manner’. Would you recommend that the office
manager use the optimal order size instead of 200
boxes?
Problem 2:
A jewelry firm buys semiprecious stones to make
bracelets and rings. The supplier quotes a price of
$8 per stone for quantities of 600 stones or more,
$9 per stone form orders of 400 to 599 stones, and
$10 per stone for lesser quantities. The jewelry firm
operates 200 days per year. Usage rate is 25 stones
2
per day and ordering costs are $48.
a) If carrying costs are $2 per year for each stone,
find the order quantity that will minimize total
annual cost.
b) If annual carrying costs are 30 percent of unit
cost, what is the optimal order size?
c) If lead time is six working days, at what point
should the company reorder?

Reply

Erick on June 26, 2021 at 8:26 pm

A. Eoq is 490
B. 421

Reply

NATALU on May 14, 2021 at 4:22 pm

An assistant manager is reviewing the costs
associated with one of the store’s better-selling
products. The data available follows.
Demand = 400 units/year

Order cost = K25/order

Holding cost = 50n/unit/year

a) They currently order a one-year supply. What are 2

the total annual ordering cost and holding cost for
this order size? (7 Marks)

b) What would be the EOQ and its associated

ordering and holding costs?
 Reply

NATALU on May 14, 2021 at 4:20 pm

As an inventory manager, you must decide on the
order quantity for an item. Its annual demand is
1,000 units. Ordering costs are K50 each time an
order is placed, and the holding cost is 25 percent
of the per-unit price. Your supplier provided the
following price schedule.

Quantity

Price per Unit

1–199

K10.00

200–499

K 9.80

500 or more

K 9.60

What ordering-quantity policy do you recommend? 2

Reply

marielmacoto on May 12, 2021 at 11:18 am

Out Camping is a manufacturer of supplies and has
several divisions, one of which is the tent division
that produces the deluxe tent Away From Home.
Fourteen thousand of these tents are made each
year. This model of tent incorporates two zipping
doors in each model. Zippers for these doors are
purchased from Zippy Zippers. Out Camping began
this year with 500 zippers in inventory, but is now
adopting an economic order quantity approach to
inventory. A review of last year’s records reveals the
following information concerning each order placed
with Zippy Zippers: variable labor— $12; variable
supplies—$1; fixed computer costs—$4; fixed office
expenses—$2; fixed mailing expenses— $2; and
fixed supplies—$1. No differences are expected
this year. Last year, the cost of carrying one zipper
in inventory for the entire year was $1, but Out
Camping has recently negotiated a new lease on its
warehouse, and the cost of carrying each zipper is
now expected to increase by 25 cents. Out Camping
also found that it took 7 days from the time an
order was sent to Zippy until the zippers were
received.

Required: Show your solutions in a detailed format.

2
a. Compute economic order quantity.
b. Compute reorder point. Presume Out Camping
has a desire to reduce its ending inventory to one-
half of this year’s beginning amount and that the
company produces the Away From Home model
140 days each year.

Reply

Yasir mehmood on July 19, 2022 at 1:17 pm

Please learn to question

Reply

Wilson mdalingwa on May 11, 2021 at 5:41 pm

Hello.
I need help to answer this question

A certain item cost $235 per ton. The monthly

requirements are 5 tons and each time the stock is
$1000. The cost of carrying inventory has been
estimated at 10% of the value of the stock per year.

(a) what is the optimal total cost.

(b) what is optimal order quantity

(c) Determine the optimal time between two orders

2
(d) what is the optimal number of orders

Reply
Zahid Alam on May 3, 2021 at 4:24 pm
Help me Solve it please

Dell computer stocks and sells laptops. Each time

to places an order it costs the store $645 with the
manufacturer for laptops. In the current year, the
company has ordered laptops for the three times.
Per month, carrying cost of the laptops in inventory
is $13. Estimated annual demand for the laptops
will be XYZ units. Determine the total minimum
inventory cost, Number of orders per year and
length of order cycle.

Reply

aima shahreena on April 17, 2021 at 4:25 pm

I NEED THE ANSWER ASAP PLEASE HELP!

a manufacturing company uses 40000 kilograms of

a raw material evenly over a period. the material is
purchased at rm2.50 per kilogram. the cost of
placing an order is rm120 and the cost of holding 1
kilogram of inventory for the period is 15% of the
purchase cost.
2
a)calculate the economic order quantify (eoq)
b)calculate the total holding of the raw material in
the period if the order quantity is 6,000 kilograms
and the buffer inventory is 2,000 kilograms.
 Reply

Mateus F Lima on April 23, 2021 at 1:44 pm

Just consider that the raw materials in kg are
units (it could make it easier for you to translate
to the inventory formulas).

a) The EOW is sqrt[(2x40000x120)/(0.15×2.5)] ~

5060

b) The total holding cost is the sum of the

normal holding cost with the buffer (safety
stock).

normal holding cost = (6000/2)x0.375 = 1125

Safety stock (buffer ) = 2000×0.375 = 750

Total holding cost = 1125 + 750 = 1875

Reply

Marshal on March 26, 2021 at 8:26 pm

Please I need an urgent help with the following
problem:
2
The demand for an item is 44,000 units per annum,
the ordering cost is $50 per order. The holding cost
per item is $2.5 per annum and the price per unit
of the item is $10. The supplier offers a discount
rate of 3% for orders between 10,000 to 31,999 and
8% discount rate for orders of 32,000 and above.

You’re required to determine the best quantity to

order

Reply

pj on March 15, 2021 at 12:04 am

ABC Corp. currently places orders for a particular
stock item at quarterly intervals. Information
concerning this items is as follows: P10 Cost of
placing an order 25,000 units Annual demand P0.50
Carrying cost per unit What annual cost saving
would result if ABC used the economic order
quantity for order sizes instead of their current
policy?

Reply

asher on January 24, 2021 at 6:54 pm

2) The Star Equipment Company purchases 54,000
bearing assemblies each year at a unit cost of 2
$40.00. The holding cost is $9.00 per unit per year,
and the ordering cost is $20.00.
(a) What is the economic order quantity?
(b) How many orders should be placed per year?
(c) If the lead time is one (01) month, what is the re-
order point for the assemblies?

Reply

G J on January 31, 2021 at 9:48 am

(a) 490
(b) 110
(c) 4500

Reply

rr on April 6, 2021 at 10:42 am

A company requires 1000 units of raw
material per month. Ordering cost is Rs 150
per order. Carrying cost in addition to Rs. 3
per unit is estimated to be 20% of average
inventory per year. Cost of raw material is
Rs. 10 per unit. Find EOQ, the number of
orders in a year, and the total Inventory
cost.

Need help with this prblm! 2

Reply

Amani Peter on July 28, 2022 at 10:35 am

 If annual requirements is 2000 units,
ordering cost is 10% per order and carrying
cost is 0.16 per year per unit of average
inventory value. Suppose the supplier
allows to pay 1/= per unit. If you buy bellow
1000, but if you buy above 1000 unit but
below 2000 you will get 5% purchase
discount (0.95/=) and if you buy 2000 unit
or above you will get 7% purchase discount
(0.93/=) what unit should you purchase? I
need the answer please.

Reply

Dahir on April 23, 2021 at 2:10 am

A firm has $ 4 per year carrying cost on each
unit of inventory and annual usage of 50,000
units. Ordering cost is $ 100 per order.
Calculate economic ordering quantity, total cost
of inventory, annual ordering cost and annual
carrying cost?

I need how to solve this question

Reply
2

joanncarlino on November 7, 2020 at 1:23 pm

Amazing post! We’re currently linking to this article
on our
website. Keep up the great writing.
King regards,
Balle Zacho

Reply

Mure on November 1, 2020 at 1:13 pm

Thanks man. Very useful.

Reply

Blet on May 2, 2020 at 12:16 pm

hardware shop in Gweru sells 2500 brackets in a
year and the sales is relatively constant throughout
the
year. These brackets are purchased from a supplier
from Harare for $15 each, and lead time is two
days.
The holding cost per bracket per year is $1.5(or
10% of the unit cost) and the ordering cost per
order is 2
$18. 75. There are 250 working days per year.
1. What is the EOQ?
2. Given the EOQ, what is the aver

Reply
 Simba on February 27, 2021 at 2:30 pm
EOQ = 250 Brackets
TOTAL COST = $ 375

Reply

issa lingwanda on January 27, 2020 at 2:12 pm

I pass through the notice i understand

Reply

Zaheer Swati on January 28, 2020 at 4:44 pm

Thank you

Reply

Sandhya Bunghoo on February 7, 2020

at 5:05 pm
I need help on a Question Sir

Reply
2
Ngwa Fuhnwi on January 28, 2021 at 5:39 am
Is it possible for you to place an order and the
delivery is done in parts? If yes how do we
calculate the EOQ.

Reply

By kash on April 9, 2021 at 5:25 am

Precision Engineering Factory consumes
50,000 units of a component per year. The
ordering, receiving and handling costs are
Rs 3 per order while the trucking costs are
Rs 12 per order. Further details are as
follows: deterioration and obsolescence
cost Rs 0.004 per unit per year; interest cost
Re 0.06 per unit per year; storage cost Rs
1,000 per year for 50,000 units. Calculate
the economic order quality

Reply

Suyog Jawade on August 3, 2021 at 5:55 am

A shopkeeper has a uniform demand of an item
at the rate of 100 items per month. He buys it
from a supplier at a cost of 12/item and the
cost of ordering is 10/order. If the stock holding 2
cost is 20% of average stock value, how
frequently should he replenish his stocks ?

Further, suppose the supplier offers a 5%

discount on orders between 200 and 999 items
 and a 10% discount on orders exceeding or
equal to 1,000, can the shopkeeper reduce his
cost by taking advantage of either of these
discounts ?

Reply

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