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

Inventory turnover, Inventory T ur nover In the accounting, ...

Inventory T ur nover In the accounting, a measure of the number of times that the average amount of inventory on hand is sold within a given time of period. In the o

Bootstrapping, In bootstrapping method, on-the-run treasury issues ar...

In bootstrapping method, on-the-run treasury issues are used as they are fairly priced, and there is no credit risk or liquidity risk involved. In practice observed yie

Irr and npv, (a) Lonesome Gulch Mines has a standard deviation of 42% per ...

(a) Lonesome Gulch Mines has a standard deviation of 42% per year and a beta of 0.10.  Amalgamated Copper has a standard deviation of 31% a year and a beta of 0.66.

Implications of gordon’s fundamental valuation, Q. Implications of Gordons ...

Q. Implications of Gordons fundamental valuation? Explanation: - The implications of Gordon's fundamental valuation may be as below: (1) While the rate of return of the firm

Plan for financial management, 1. Review and analyse financial data for the...

1. Review and analyse financial data for the last year to establish areas which have generated a profit or loss in your organisation. 2. Conduct a research to review reasons for

Weighted average cost of capital or composite, Q. What is denoted by weight...

Q. What is denoted by weighted average cost of capital OR Composite? How is it calculated? Exemplify with an example. Ans. Weighted Average Cost of Capital: - Capital formation

Define financial management, Financial management is that division of manag...

Financial management is that division of managerial process which is concerned with the planning and controlling of firm's financial resources. It is concerned with the procurement

Financial accounting, Briefly explain the accounting concepts which guide t...

Briefly explain the accounting concepts which guide the accountant at the recording stage.

What is sinking fund, What is Sinking Fund A provision which requires t...

What is Sinking Fund A provision which requires the corporation to set aside a fixed amount every year to help provide for orderly repayment of the debt issue.

Caselet 2, SUGGESTION REGARDING CREDIT LIMIT. SHOULD IT BE APPROVED OR NOT,...

SUGGESTION REGARDING CREDIT LIMIT. SHOULD IT BE APPROVED OR NOT, WHAT SHOULD BE THE AMOUNT OF CREDIT LIMIT THAT ELECTRONICS GIVE TO BOOTH PLASTICS

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