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

Principles and concepts of financial accountin, explain the types of princi...

explain the types of principles and concepts of financial accountin

Modern techniques, what are five modern financialaccounting techniques

what are five modern financialaccounting techniques

Calculate yield to maturity, Calculate Bond's Yield to Maturity Consid...

Calculate Bond's Yield to Maturity Consider a coupon bond that has a $1,000 per value and a coupon rate of 10%. The bond is currently selling for $1,150 and has 8 years to mat

Which of the following statements is true, Richard Company had 102,000 shar...

Richard Company had 102,000 shares of $5 par value common stock issued and outstanding before repurchasing 10,200 shares for $76,500. Richard had received $2,040,000 cash from shar

Identify the various prices for job, Identify the various prices for job ...

Identify the various prices for job To identify the various prices for job, there are numerous points to be considered, including: ?How many garages shall we visit? ?What

The optimal distribution policy strikes, The optimal distribution policy st...

The optimal distribution policy strikes that balance between current dividends and capital gains that maximizes the firm's stock price

Piecemeal realizations and distributions, Piecemeal Realizations and Distri...

Piecemeal Realizations and Distributions Partnership dissolutions may take a substantial number of days even months) so it is unlikely that all cash generated will be simultane

Annual interest rate, Interest Rate on a one Payment Your parents will ...

Interest Rate on a one Payment Your parents will retire in 17 years. They presently have $270,000, and they think they will require $1 million at retirement. What annual intere

Computations, This is a comprehensive assessment of the material related to...

This is a comprehensive assessment of the material related to our first two class meetings.  You are NOT being tested on material related to capital budgeting (NPV, IRR, etc.). Tha

Determine arbitrage-free rate of interest, The government of a country has ...

The government of a country has just issued a series of zero-coupon bonds maturing at the end of years 1, 2, 3 and 4. Suppose the spot rates (or continuously compounded yields per

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