Explain economic order quantity, Financial Management

Assignment Help:

Q. Explain Economic Order Quantity?

Economic Order Quantity (EOQ):- Economic order quantity (EOQ) is that quantity of material for which each order must be placed. Purchasing large quantities at one time as well as keeping the same as stock and increases carrying cost of inventories but reducing ordering cost of inventories. Alternatively small orders reduce the average inventory level thereby reducing the carrying cost of inventories however increasing the ordering costs because of increased number of purchase orders. Thus determination of economic order quantity is a trade-off between two types of inventory costs:

(i) Ordering costs: - Ordering costs comprises costs of placing orders as well as cost of receiving delivery of goods such as clerical expenses in preparing a receiving expenses, purchase order, transportation expenses, inspection expenses and recording expenses of goods received.

(ii) Carrying Cost: - Carrying cost comprises costs of maintaining or carrying inventory such as insurance expenses, godown rent etc. These costs vary with inventory size.

The sum of ordering costs as well as carrying costs represents the total costs of inventory. Economic order quantity is that order quantity at which the total of ordering as well as carrying cost is minimum. Economic order quantity is able to be explained with the help of following diagram:

606_Explain Economic Order Quantity.png

Formula: - EOQ can be resolved by the following formula:

759_Explain Economic Order Quantity1.png

EOQ = Economic Order Quantity

R = Annual purchase Requirements in units

O = Ordering cost per order

C = Carrying cot per unit.


Related Discussions:- Explain economic order quantity

What are the major sections of the statement of cash flows, What are the ma...

What are the major sections of the statement of cash flows? a.Cash flows from Operations b.Cash flows from investing activities c.Cash flows from financing activities

Essentials of rating service, Critical investment decisions may be ta...

Critical investment decisions may be taken based on the ratings offered by the credit rating agency. In order to ensure that the rating leads to good investment d

What do you mean by synergy, Q. What do you mean by synergy? Synergy: s...

Q. What do you mean by synergy? Synergy: synergy refers to the greater combined value of merged firms than the sum of the values of individual units. It is something like one p

Divisional performance evaluation, In modern strategic management accountin...

In modern strategic management accounting it is important to use appropriate performance measurements and control concepts, underpinned by theories and models applied in a variety

Assessing creditworthiness of an issuer of bond, Following are the areas an...

Following are the areas an analyst should consider while assessing the creditworthiness of an issuer. 1. Security Limitations: The bond indenture shoul

Simple average of the outcomes - time constraint, 1. Your welfare depends o...

1. Your welfare depends on how much time you travel T and how much time you play P and is the product of the two, i.e.,  W = T * P (a) The total amount of time you have is 10 ho

Define accounts receivable are sometimes not collected, Accounts receivable...

Accounts receivable are sometimes not collected.  Why do companies extend trade credit when they could insist on cash for all sales? Extending trade credit almost all the time le

Explain the strategic alliance, Explain the Strategic alliance Two  or ...

Explain the Strategic alliance Two  or  more  organisations  agree  to  work  and  collaborate  informally  together  however remaining  independent  from  one  another. Simila

Compute the expected stock price, 1. Using ratio analysis, compare your fif...

1. Using ratio analysis, compare your fifth year to the current year and discuss. 2. Compute the expected stock price at the end of the fifth year. Assume your stockholders hav

Operating cycle, discuss the applicability of an operating cycle of a veget...

discuss the applicability of an operating cycle of a vegetable growing business

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