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

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

evaluate the importance of leverage in financial management of a small scale business

Subsidiary companies-group accounts , SUBSIDIARY COMPANIES (1AS 27) A sub...

SUBSIDIARY COMPANIES (1AS 27) A subsidiary company is a company in which the investing company (also called holding or parent company) controls the financial and operating polici

What is capital expenditure, Calculat capital expenditure, How to define Ca...

Calculat capital expenditure, How to define Capital expenditure This is kind of expenditure on fixed assets like as plant or equipment, the cost of which is spread over several

Retirement benefits and why it is shown in annual report, Retirement benefi...

Retirement benefits 1)      Provident fund and family pension: a.       Contribution to PF and PPF are provided for and payments in respect thereof are made to the relevant

What is the total risk and total return, Financials Investments, a group of...

Financials Investments, a group of financial advisors and retirement planners, has been requested to provide advice on how to invest $200,000 for one of its clients. The client has

Which product should harper tell its sales personnel, Harper Co. provided t...

Harper Co. provided the following information concerning two products: contribution margin per unit- product 12 $46 Contribution margin per unit-product 43 $30. Machine hours requi

Interest is deductible on schedule a, Heather & Terry have a mortgage on th...

Heather & Terry have a mortgage on their primary residence of $750,000 and a mortgage on their vacation home of $410,000. In 2013, they incurred $46,400 of mortgage interest expens

Tracing trust property-breach of law-trusts laws , Tracing trust property ...

Tracing trust property   Apart from suing the trustee, in the event of a breach of trust, the beneficiary may follow the trust property and recover it from third parties, or the p

Explain about spring and forward loading, Q. Explain about Spring and Forwa...

Q. Explain about Spring and Forward loading? Spring loading - Timing of option grants to occur before good news or after bad news is released Concerns about insider trading

The maturity date of a note receivable, The maturity date of a note receiva...

The maturity date of a note receivable 1. Is the day of the credit sale 2. Is the day the note was signed 3. Is the day the note is due to be paid 4. Is the date of the first payme

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