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In other words it is the optimal inventory size that should be ordered with the supplier to minimize the total annual inventory cost of the business. Economic order quantity is defined as the optimum level of quantity and frequency of orders for a particular level of demand.

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Economic order quantity uses ordering costs and holding costs to determine the certain level of orders required.

Economic order quantity formula. Economic order quantity eoq is a decision tool used in cost accounting. Economic order quantity eoq is the ideal order quantity a company should purchase for its inventory given a set cost of production a certain demand rate and other variables. It s a formula that allows you to calculate the ideal quantity of inventory to order for a given product.

It s a formula that allows you to calculate the ideal quantity of inventory to order for a given product. The economic order quantity formula is calculated by minimizing the total cost per order by setting the first order derivative to zero. This formula aims at striking a balance between the amount you sell and the amount you spend to manage your inventory.

The components of the formula that make up the total cost per order are the cost of holding inventory and the cost of ordering that inventory. This is done to minimize inventory holding costs and order related costs. Economic order quantity eoq is derived from a formula that consists of annual demand holding cost and order cost.

Economic order quantity eoq is the order size that minimizes the sum of ordering and holding costs related to raw materials or merchandise inventories.