The formula for the Economic Order Quantity (EOQ) is:
Square root of (24* Monthly Demand of Product * Acquisition Cost) / (Carrying Cost * Cost of Product)
Important:
The system uses the REP-COST is recorded in Price
Line Maintenance. If there is no REP-COST recorded, then the
system uses the value listed in the Basis Line #6 on the Price
Line Maintenance window.
If
both the REP-COST and the Basis Line #6 are blank, the system
uses a zero (0) value. So, you must ensure that you have a value
in one of the two fields in Price Line Maintenance.
Product A has a demand per month of 5 and a unit cost of $12.00. The cost of processing a purchase order has been determined to be $1.75 and the cost of carrying the item in inventory is 30%.
In the above example, considering the cost of processing a purchase order and the cost of carrying the item in inventory, the most cost-effective quantity of Product A to order at one time is 8 units.
See Also: