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

Savings, This is the part of after-tax personal income that is not spent.

This is the part of after-tax personal income that is not spent.

State the disadvantages of ias 14 risk and return approach, State the Disad...

State the Disadvantages of ias 14 risk and return approach Segments may include operations with different risk and returns. Difficulty in defining segments, which mak

Calculation of weighted average cost of capital, Calculation of Weighted Av...

Calculation of Weighted Average Cost of Capital The calculation of weighted cost of capital involves the following steps: (i) Calculate the cost of each source of funds.

Decision making, Write a report to the Board of Directors of Solvent Ltd to...

Write a report to the Board of Directors of Solvent Ltd to analyse the performance of companies X and Y and to give recommendation as which of those two investment opportunities is

Explain the dividends and interest payments, Dividends and interest payment...

Dividends and interest payments Payment  of  dividends  and  interest  can  either  be  demonstrated under financing activities or  under operating activities. Sum of the 3

Price supports or acreage limitation programs cost society, Suppose the gov...

Suppose the government wants to increase farmers’ incomes.  Why do price supports or acreage limitation programs cost society more than simply giving farmers money? Price acrea

Why depreciation play in estimating incremental cash flows, What role does ...

What role does depreciation play in estimating incremental cash flows? Depreciation expense is a tax deductible expense and thus affects cash flow through its effect on taxes.

Required rate of return , Required Rate of Return (R i )  The required...

Required Rate of Return (R i )  The required rate of return (Ri) is the minimum rate of return that a project must generate if it has to receive funds.  It’s thus the opportun

What do you mean by wealth maximization, Q. What do you mean by Wealth Maxi...

Q. What do you mean by Wealth Maximization? This is also known as value maximization or net present worth maximization approach, it takes into consideration the time value of m

Illustrate about foreign exchange earnings, Q. Illustrate about foreign exc...

Q. Illustrate about foreign exchange earnings? In theory foreign exchange earnings must not be hedged as the chances of an adverse movement are equivalent to those of a favoura

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