Explain EOQ

Question

Give a brief introduction of the term EOQ?

Answer 1

Economic Order Quantity (or EOQ) is the quantity which is fixed in such a manner that the variable costs for managing the inventory can be reduced. This comprises two parts: Ordering Cost and Carrying Cost. Ordering cost comprises all the costs combined with the administrative efforts connected with preparation of purchase requisitions, filing tenders, enquiries, and comparative statements and so forth. Which are occurred in ordering material. Carrying cost comprises all the costs which are occurred in carrying or holding the inventory like go-down rent, assurance handling expenditures and so on. There is an opposite relationship between ordering cost and ordering cost. An effort must be made to balance both the costs, which is probable at Economic Order Quantity where the total variable cost of managing the inventory is minimums.