In the basic eoq model, if d = 60 per month, s = $12, and h = $10 per unit per month, eoq is

Calculating Economic Order Quantity

The following formula is used to calculate the EOQ:

Economic Order Quantity:
√(2 x S x D)/H

Annual Demand (D)

The Annual demand is the number of units that you sell annually. If actual units are not available, then you can use expected sales figure based on your sales trend.

Order cost (S)

This refers to the costs that are involved with an order but cannot be directly associated with the purchase cost.

Holding cost (H)

This refers to all the costs that are involved in storing or handling the items in your store or warehouse. Usually, holding costs are fixed in nature.

What are the components of Economic Order Quantity?

Annual Demand Calculation (D)

The Annual demand is the number of units that you sell annually. If actual units are not available, then you can use expected sales figure based on your sales trend.

The following table will give you a better idea about what the other factors are that can have an impact on demand and your business operations:

Market conditions

• Change in customer taste
• Competition
• Shift in industry standards

Economic conditions

• Change in tax rate
• Trade regulations, domestic and international
• Monetary policy

Order Cost Calculation (S)

This refers to the costs that are involved with an order but cannot be directly associated with the purchase cost.

• ► Transport charges and custom duties incurred during the movement of the items
• ► Clerical charges paid to an outsourced agency for recording transaction
• ► Salary paid to the quality check team before the items enter your warehouse
• ► Amount spent in setting up a machine or equipments

Holding cost calculation (H)

This refers to all the costs that are involved in storing or handling the items in your store or warehouse. Usually, holding costs are fixed in nature.

• ► Monthly rent for the shop or warehouse that you use to store items
• ► Employees salary and warehouse labor wages
• ► Electricity and insurance cost

Assumptions while calculating EOQ

The EOQ is a great metric for any business dealing with the buying and selling of goods. However, it's important to remember the assumptions that the EOQ formula is based on:

The bottom line

Economic Order Quantity may not consider all the factors that affect each business, but it is still a powerful tool to help an entrepreneur or manager to make more calculated decisions. What makes the EOQ a compelling tool is that it is dynamic and can be revisited from time to time as your business grows. If there's a change in any of your inventory costs, you can always tweak the formula and generate a new EOQ to suit the current conditions.

Calculating the EOQ for your business helps you find a good balance for your order and inventory costs, which are easy to overlook in day-to-day business. The EOQ formula shouldn't be taken as gospel, but it's a useful tool for informed, effective inventory control.

61. Which of the following interactions with vendors would potentially lead to inventory reductions?
a. reduce lead times
b. increase safety stock
c. less frequent purchases
d. larger batch quantities
e. longer order intervals

62. A non-linear cost related to order size is the cost of:
a. interest
b. insurance
c. taxes
d. receiving
e. space

63. In a two-bin inventory system, the amount contained in the second bin is equal to the:
a. ROP
b. EOQ
c. amount in the first bin
d. optimum stocking level
e. safety stock

64. When carrying costs are stated as a percentage of unit price, the minimum points on the total cost curves:
a. Line up
b. Equal zero
c. Do not line up
d. Cannot be calculated
e. Depend on the percentage assigned

67. In an A-B-C system, the typical percentage of the number of items in inventory for A items is about:
a. 10
b. 30
c. 50
d. 70
e. 90

68. In the A-B-C classification system, items which account for fifteen percent of the total dollar-volume for a majority of the inventory items would be classified as:
a. A items
b. B items
c. C items
d. A items plus B items
e. B items plus C items

69. In the A-B-C classification system, items which account for sixty percent of the total dollar-volume for few inventory items would be classified as:
a. A items
b. B items
c. C items
d. A items plus B items
e. B items plus C items

73. In a supermarket, a vendor's restocking the shelves every Monday morning is an example of:
a. safety stock replenishment
b. economic order quantities
c. reorder points
d. fixed order interval
e. blanket ordering

75. A risk avoider would want ______ safety stock.
a. Less
b. More
c. The same
d. Zero
e. 50%

77. In the basic EOQ model, if lead time increases from five to 10 days, the EOQ will:
a. double
b. increase, but not double
c. decrease by a factor of two
d. remain the same
e. none of the above

78. In the basic EOQ model, an annual demand of 40 units, an ordering cost of $5, and a holding cost of $1 per unit per year will result in an EOQ of:
a. 20
b. square root of 200
c. 200
d. 400
e. none of these

79. In the basic EOQ model, if D = 60 per month, S = $12, and H = $10 per unit per month, EOQ is:
a. 10
b. 12
c. 24
d. 72
e. 144

80. In the basic EOQ model, if annual demand is 50, carrying cost is $2, and ordering cost is $15, EOQ is approximately:
a. 11
b. 20
c. 24
d. 28
e. 375

82. Given the same demand, setup/ordering costs, and carrying costs, the EOQ calculated using incremental replenishment will be ____________ if instantaneous replenishment was assumed:
a. greater than the EOQ
b. equal to the EOQ
c. smaller than the EOQ
d. greater than or equal to the EOQ
e. smaller than or equal to the EOQ

83. The introduction of quantity discounts will cause the optimum order quantity to be:
a. smaller
b. unchanged
c. greater
d. smaller or unchanged
e. unchanged or greater

84. A fill rate is the percentage of _____ filled by stock on hand.
a. Shipments
b. Demand
c. Inventory
d. Safety stock
e. Lead time

86. Which one of the following is not generally a determinant of the reorder point?
a. rate of demand
b. length of lead time
c. lead time variability
d. stockout risk
e. purchase cost

88. If average demand for an inventory item is 200 units per day, lead time is three days, and safety stock is 100 units, the reorder point is:
a. 100 units
b. 200 units
c. 300 units
d. 600 units
e. 700 units

90. Which one of the following is implied by an "annual" service level of 95 percent?
a. Approximately 95 percent of demand during lead time will be satisfied.
b. The probability is 95 percent that demand will exceed supply during lead time.
c. The probability is 95 percent that demand will equal supply during lead time.
d. The probability is 95 percent that demand will not exceed supply during lead time.
e. None of the above.

94. Which of these products would be most apt to involve the use of a single-period model?
a. gold coins
b. hammers
c. fresh fish
d. calculators
e. frozen corn

98. If, in a single-period inventory situation, the probabilities of demand being 1, 2, 3, or 4 units are .3, .3, .2, and .2, respectively. If two units are stocked, what is the probability of selling both of them?
a. .5
b. .6
c. .7
d. .8
e. none of these

100. An operations strategy for inventory management should work towards:
a. increasing lot sizes
b. decreasing lot sizes
c. increasing safety stocks
d. decreasing service levels
e. increasing order quantities

101. Cycle stock inventory is intended to deal with ________.
a. excess costs
b. shortage costs
c. stockouts
d. expected demand
e. quantity discounts

105. With an A-B-C system, an item that had a high demand but a low annual dollar volume would probably be classified as:
a. A
b. B
c. C
d. none of these

108. Which one of these would not be a factor in determining the reorder point?
a. the EOQ
b. the lead time
c. the variability of demand
d. the demand or usage rate
e. all are factors