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Economic (optimum) Ordering Quantity (EOQ)

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Abbie Foster

on 29 October 2014

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Transcript of Economic (optimum) Ordering Quantity (EOQ)

What is it?
EOQ- The optimal quantity that should be ordered; it is this quantity that will minimize the total inventory costs.
How is it used?
The EOQ is used to determine the optimal amount of inventory that a firm should carry.

T (Total Demand)= 78,000 shirts per year
C (carrying cost as a percentage of the purchase price of each inventory item)= 25 percent of inventory value
PP (Purchase Price, or cost, per unit)= 3.84 per shirt

O (fixed costs per order)= 260 per order

Square root of 2x260x78000/.25x3.84= square root of 42,250,000= 6500
Terms Associated with Inventory Management
Inventory Terms:
Raw Materials: the inventories purchased from suppliers that ultimately will be transformed into finished goods.

Work-In-Progress: Inventory in various stages of completion, some work-in-process is at the very beginning of the production process while some is at the end of process.

Finished Goods: Inventories that have completed that production process and are ready for sale.
The End!
Economic (optimum) Ordering Quantity (EOQ)
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