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

Communication and leadership, hi could you please help me in my assignment ...

hi could you please help me in my assignment i need it by 11/1/2017

Explain what happens if a swap is used ineffectively, The key criterion for...

The key criterion for qualifying as a hedge is that the hedging relationship must be highly effective in achieving offsetting changes in fair values or cash flows based on the hedg

Discuss the pros and cons of financing in unhedged, You have the following ...

You have the following information about rates in London for Eurocurrency loans of one-year duration, the exchange rate between the USD and euros, the currency in which you want fi

D, #questiondd

#questiondd

Grants are not necessarily recognized as revenue, Grants are not necessaril...

Grants are not necessarily recognized as revenue when they are awarded. Columbus City was awarded a state reimbursement grant of $150,000 to assist its adult literacy program. The

Financial managment, How is a company’s cost of capital affected by its tax...

How is a company’s cost of capital affected by its tax rate?

Evaluating the results of testing, Use of Professional Skepticism when Eval...

Use of Professional Skepticism when Evaluating the Results of Testing - AUDITOR should conduct the audit of internal control over financial reporting and audit of financial stateme

Journalize the transactions, During it's first year of operations, Rosa Cor...

During it's first year of operations, Rosa Corp has these transactions pertaining to its common stock. Jan. 10 Issued 30,000 shares for cash at $5 per share July 1 Issued 60,000 sh

Determine the accounting aspects of business, Determine the accounting aspe...

Determine the accounting aspects of business Accounting scandals can have a profound effect on all those connected with business. Enron scandal, for instance, ultimately led t

Cashflows from investing activities-group accounts, Cashflows from investin...

Cashflows from investing activities Involving activities involve the acquisition and disposal of non-current assets such as; property, plant and equipment, intangible assets, a

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