What should be Economic Order Quality (EOQ) for procurement of 20000 units annually at a price of Rs. 12 per unit for consumption in production, when the cost per order is Rs. 2000 and the inventory carrying cost is 25 percent of inventory value?

Economic Order Quantity (EOQ):

• Economic Order Quantity is a tool used to determine the volume and frequency of orders required to satisfy a given level of demand while at the same time minimizing the cost per order.
• It is a set point designed to help companies minimize the cost of ordering and holding inventory.
• The cost of ordering inventory decreases with the increase in ordering volume due to purchasing on economies of scale.
• As the size of inventory grows, the cost of holding the inventory rises.
• EOQ is the point that minimizes both of these costs.
• It is used in the field of Operations, logistics, and Supply Management.
• EOQ Formula: 

where, A = Consumption of units during a year i.e. 20000 units;

O = Cost of placing one order including cost of receiving the goods i.e. 2000;

C = Interest cost per unit per year including other variable costs of storing it i.e. 12 * 25%.

Solution:

• EOQ = √ 2AO/C
• = √ 2*20000*2000 / 12*0.25
• = √ 80000000 / 3
• = √ 26666667
• = 5164 units.

Therefore, Economic Order Quality (EOQ) for procurement of 20000 units annually at a price of Rs. 12 per unit for consumption in production, when the cost per order is Rs. 2000 and the inventory carrying cost is 25 percent of inventory value will be 5164 units.