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

Compare solvency of the two company, $in million Pepsi Coca cola Net c...

$in million Pepsi Coca cola Net cash provided by operating activities $6,796 $8,186 Average current liability 8,772 13,355 Average total liability 22,909 21,491

Estimate the expected return, Case study Josephine Josephine has jus...

Case study Josephine Josephine has just landed her first job out of graduate school.  She is lucky enough to be working for one of the Big Four, earning $50,000 per year.  S

Various types of accounting changes can affect the financial, Various types...

Various types of accounting changes can affect the financial statements of a business enterprise differently. Assume that the following list describes changes that have a material

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

FDD , fimnancial accounting system

fimnancial accounting system

A realized gross profit, On December 15, 2011 Risby Sales Co. sold a track ...

On December 15, 2011 Risby Sales Co. sold a track of land that cost $3,600,000 for $4,500,000. Rigsby appropriately uses the installment sale method of accounting for this transact

#1, #1. Quarter Corporation had the following transactions during the quart...

#1. Quarter Corporation had the following transactions during the quarter ended June 30, 2010: Loss from tsunami damage (extraordinary) $985,000 Payment of fire insurance premium f

Trustees remuneration-trusts laws and accounts, Trustees remuneration A...

Trustees remuneration A trustee may not receive remuneration except: 1. By order of the court, if the trust is very onerous or the services of the trustee very valuable;

Income statement-group accounts, Normal 0 false false false...

Normal 0 false false false EN-US X-NONE X-NONE MicrosoftInternetExplorer4

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