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

Difference between transaction and translation risk, Question: You have...

Question: You have been appointed as the head of the treasury of Platza International, an automobile firm with many subsidiaries abroad. The management of Platza International

Explain the meaning of ledger, Question 1 Write short notes on following- ...

Question 1 Write short notes on following- Explain any five important functions of accounting What is Book-Keeping? Explain features of book-keeping Question 2 Ex

American stock exchange - amex, It is the third-largest stock exchange by t...

It is the third-largest stock exchange by trading size in the United States. In 2008 it was get hold by the NYSE Euronext and turn into the NYSE Amex Equities in 2009. The AMEX is

Estimate the average beta of investment in the t-bills, You know that Treas...

You know that Treasury bills have a beta of 0 because they are risk-free.  A portfolio of technology stocks has a beta of 3.  You plan to invest 40% of your investment capital in T

Show social and regulatory factors, Q. Show Social and Regulatory Factors? ...

Q. Show Social and Regulatory Factors? Regulatory climate and legislation against the environmental degradation may impair the profitability of the industry. Price control, vol

Consequence of the cash operating cycle, Q. Consequence of the cash operati...

Q. Consequence of the cash operating cycle? The cash operating cycle is the length of time among paying trade payables and receiving cash from receivables. It is able to be cal

Risk and return, I need report on Risk and Return. Do you provide help in t...

I need report on Risk and Return. Do you provide help in topic Risk and Return? I need expert's assistance to solve my college assignment. Please suggest if it works for me.

Operating cycle, what is the applicability of the operating cycle in a vege...

what is the applicability of the operating cycle in a vegetaion farm in Uganda

Display profit diagrams for long stock and for short stock, Question: (...

Question: (a) A stock currently sells for $80 and a put option with an exercise price of $80 currently sells for $2. Find the percentage gain to an investor in the common stock

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