Economic order quantity formula, Financial Accounting

Assignment Help:

For getting the EOQ formula we shall use the subsequent symbols:

U = annual usage/demand

Q = quantity ordered

F = cost per order

C = per cent carrying cost

P  = price per unit

TC = total costs of ordering and carrying

Specified the above assumptions and symbols, the net costs of ordering and carrying inventories are equivalent to

TC = U/Q × F + Q/2 × P ×C

In the equation, the initial term on the right-hand side is the ordering cost, acquired as the product of the number of orders (U/Q) and the cost per order (F) and the next term on the right-hand side is the carrying cost, acquired as the product of the average value of inventory holding (QP/2) and the percentage carrying cost C.

The total cost of ordering and carrying is minimized as:

Q =    √(2FU/PC)

That can be acquired by putting the first derivative of TC regarding Q and equating this with zero.

dTC/dQ = ( - UF/ Q2 )+ (PC/2) = 0

- 2UF + Q2PC = 0

Q2 PC + 2UF

Q2 =  2UF/ PC

Q =    √(2UF/ PC)

Suppose here the second derivative condition is satisfied:

The formula embodied in the equation is the EOQ formula. This is a helpful tool for inventory management. This tells us what must be the order size for the purchase of items and what must be the size of production run for manufactured items.

The EOQ model may be demonstrated with the assist of the subsequent data relating to the Ace Company.

U = annual sales = 20,000 units

F = fixed cost per order =Rs. 2,000

P = purchase price per unit = Rs. 12

C = carrying cost= 25 per cent of inventory value.

Plugging in these values in eq. (2) we determine that:

Q = √(2 × 2,000× 20, 000)/( 12×0.25)

= 5.164


Related Discussions:- Economic order quantity formula

Bankrupt person-bankruptcy and liquidation, Bankrupt person A bankrupt ...

Bankrupt person A bankrupt is a person against whom an adjudication order has been made by the court primarily on the grounds of his insolvency. Any person (other than a body c

Common stock, The common stock of the CC Corporation has been trading in a ...

The common stock of the CC Corporation has been trading in a narrow price range of around $50 for months, and you are convinced it is going to stay in that range for the next 3 mon

Leverage, Evaluate the importance of leverage in financial management of a ...

Evaluate the importance of leverage in financial management of a small scale company

Prepare a bank reconciliation for the month of october, The John Company ma...

The John Company maintains a checking account at the Bank of the Cumberland. The bank provides a bank statement along with canceled checks on the last day of each month. The Octobe

Financial statements, Describe the following questions:- Q.1 Explain how...

Describe the following questions:- Q.1 Explain how financial statements assist in the capital allocation process. How are financial statements limited? Which financial statement

Balance sheet, limitations of the balance sheet

limitations of the balance sheet

Leverage or gearing ratios, Leverage or Gearing Ratios - These ratios inc...

Leverage or Gearing Ratios - These ratios include the Long Term Debt to Equity Ratio, Total Debt to Equity Ratio, Interest Coverage Ratio. Here, the interest coverage ratio is al

Responding to various stakeholder groups, Q. Responding to various stakehol...

Q. Responding to various stakeholder groups? If a company has a solitary objective in terms of maximising profitability then it is only responding to one stakeholder group name

Concepts in accounting, Mr. Inherits 30000. Decides to open a salon jj salo...

Mr. Inherits 30000. Decides to open a salon jj salon. On 1/4/2016 commits 10000 to the business Opens an a/c in the bank What will be the money under capital in his books on 1/4/10

Evlaute expected value of sales volume, Q. Evlaute Expected value of sales ...

Q. Evlaute Expected value of sales volume? (17500 × 0·3) + (20000 × 0·6) + (22500 × 0·1) = 19500 units Expected NPV = (((19500 × 1·35) - 10000) × 3·605) - 50000 = $8852 W

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd