Page 74 - Microsoft Word - 00 ACCA F2 Prelims.docx

Chapter 5

3.2 Economic order quantity (EOQ)

This is the order size that minimises the total costs of holding and ordering inventory.

EOQ = 2×C o × 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

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

Illustrations and further practice

Now try TYU question 6 from Chapter 5

68