Calculation Of Economic Order Quantity(EOQ)

The economic order quantity can be determined in the following ways.

1. Formula Method
With the help of following formula, the economic order quantity can be calculated.



2. Graphical Method

Under this method, the carrying cost, ordering cost and total cost are shown on graph. It is based on the principle that the total carrying cost increases as the order size increases. However, the ordering cost decreases if the order size increases. The point at which the ordering cost and carrying cost intersects each other, total cost is minimum.

3. Trial And Error Method

If the total needs of inventory for a form are known, the firm has different alternatives to purchase its inventories. It can buy its total needs in a single order at the beginning of the year or the inventories may be purchased in small orders periodically. If the purchase are made in one order, the average inventory holdings will be relatively large whereas they will be relatively small when the acquisition of inventory is in small lots. High average inventory would involve high carrying cost and low average inventory holdings are associated with high ordering costs. According to this method, the carrying and ordering costs for different sizes of orders to purchase inventories are computed and the order size with the lowest total cost of inventory is the economic order quantity.