Operations research
Explainer
Economic Order Quantity: How Much to Order
Order too often, you pay fees. Order too much, you pay storage. Where's the balance?
Quick check · tap an answer to continue
Lesson notes
Key points
- The EOQ model chooses an order size that minimises total inventory cost when demand is constant and known.
- Annual ordering cost falls as order size rises, while annual holding cost rises, because average stock is Q over two.
- Total cost is lowest exactly where the two costs are equal, which gives the square-root EOQ formula.
- If annual demand is 1000 units, order cost 50 cedis and holding cost 4 cedis per unit, Q star is about 158 units.
Definitions
- Economic Order Quantity
- The order quantity Q that minimises annual ordering plus holding cost under steady, known demand.
Takeaway: EOQ = √(2DS ÷ H), where ordering cost equals holding cost.
Quick check: At the EOQ, how do ordering and holding costs compare?
- Ordering is double
- Holding is zero
- They are equal
Total cost is minimised where annual ordering cost equals annual holding cost.
EOQCost trade-offEOQ formulaWorked example
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