What is Economic Order Quantity?
There are two costs attached to stock:
1) Ordering Cost : All cost which are incurred during the ordering of stock, like phone calls, transportation cost etc
2) Holding Cost : Storage costs, like rent of the building etc.
Now if we purchase all the required material in a single order, although we can save Ordering Cost, but Holding Cost would be high, and if we purchase our material in several shipments, holding cost would be lowered, but Ordering Cost would be high.
So, Economic Order Quantity is the balance between these two costs. Economic Order Quantity is cheapest taken as a whole. At EOQ, both ordering cost and holding cost are equal.
The Formula of EOQ are given, and while solving the questions you will be using them.
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