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

Three-phase source voltages and phase sequence, Q. Three-phase source volta...

Q. Three-phase source voltages and phase sequence? The elementary three-phase, two-pole generator shown in Figure has three identical stator coils (aa, bb, and cc) of one or

Why iceq go beyond icq, ICEQ'sgo beyond ICQ's Discover whether erro...

ICEQ'sgo beyond ICQ's Discover whether error or fraud is possible. Concentrates on significant frauds or errors which might be possible and so only a handful of key con

Explain composite currency bond, Explain Composite Currency Bond Compos...

Explain Composite Currency Bond Composite currency bonds are denominated in a currency basket, like SDRs or ECUs, in place of a single currency.They are often known as currency

Assignment, Imagine you have been allocated $100,000 which is to be investe...

Imagine you have been allocated $100,000 which is to be invested in 8 companies listed on the Australian Stock Exchange (ASX). You are required to have a balanced portfolio betwee

Why are trend analysis and industry comparison important, Why are trend ana...

Why are trend analysis and industry comparison important to financial ratio analysis? Trend analysis assists financial managers and analysts see if a company's current financia

Macro-economic analysis, Macro-Economic Analysis Measuring the Level o...

Macro-Economic Analysis Measuring the Level of Economic Activity Gross National Product (GNP) and the Gross Domestic Product (GDP) are the two most widely used aggregates

Deficit financing, It is the most useful method of promoting economic devel...

It is the most useful method of promoting economic development. It may be used for the development of economic and social overheads such as construction of roads, railways, power p

Why do financial managers calculate the marginal tax rate, Why do financial...

Why do financial managers calculate the marginal tax rate? Financial managers make use of marginal tax rates to estimate the future after-tax cash flows from investments. As th

What do you meant by common stocks in the financial term, What do you meant...

What do you meant by common stocks in the financial term? Common Stocks: Common stocks illustrate ownership interests into the firm. Common stockholders obtain dividends (wh

What do you know about sinking funds, Q. What do you know about sinking fun...

Q. What do you know about sinking funds? sinking funds : quite often, one may be interested to accumulate a target amount over a given period inclusive of interest for the peri

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