Economic Order Quantity

Economic Order Quantity

Economic order quantity is one of the important techniques used to determine the optimum quantity or number of orders to be placed from the suppliers. The main objectives of economic order quantity is to minimize the cost of ordering, cost of carrying material and total cost of production.

Ordering costs include cost of stationary, salaries of those engaged in receiving and inspecting, general office and administrative expenses of purchase departments. Carrying cost are incurred on stationary, salaries, rent, material handling cost, interest on capital, insurance cost, risk of obsolescence, deterioration and wastage of material and evaporation.

Economic order quantity can be calculated by

Where,

A = annual consumption

B = buying cost per order

C = cost per unit

S = storage and carrying cost per annum