Page 103 - F2 - MA Integrated Workbook STUDENT 2018-19
P. 103
Accounting for materials
3.2 Economic order quantity (EOQ)
This is the order size that minimises the total costs of holding and ordering inventory.
o
EOQ = 2 × C × D
C h
C o = cost of place an order
D = annual demand
C h – cost of holding one unit of inventory for one year
Example 2
A business uses 3,125 units of raw material per annum. It costs $20 to place
an order and $0.50 to hold one unit of inventory for one year.
Calculate the EOQ.
EOQ = 2 × 20 × 3,125 = 500 units
0.50
Test your understanding 3
The demand for a particular product is expected be 25 units a day. Each time
an order is placed, administrative costs of $15 are incurred and one unit of
inventory held for one year incurs $0.10 of holding costs.
The company operates a 300-day year.
Calculate the economic order quantity.
95
