Question

What is the EOQ model? What assumptions are necessary to apply it? How do these assumptions change the nature of the cycle inventory pattern graphically?

Answer 1

EOQ model:- Economic order quantity is the size of the lot to be purchased which is economicallyviable.This is the quantity of materials which can be purchased at minimum cost.

Generally,economic order quantity is the point at which inventory carrying cost are equal to the order costs. in determining economic order quantity it is assumed that cost of a managing inventory is made of solely of two parts i.e. ordering costs and carrying costs.

A) Ordering costs:-These are costs that are associated with the purchasing or ordering of materials.

These costs include: 1) Inspection costs of incoming materials.

2) Cost of stationery, typing,postage,telephone charges etc.

3) expenses incurred on transportation of goods purchased

These costs are also known as buying costa and will arise only when some purchase are made.

   B) Carrying costs: these are costs for holding the inventories. These costs will not be incurred if inventories are not carried. these costs include:

1) The cost of capital invested in inventories. An interest will be paid on the amount of capital locked up in inventories.

2) Cost of storage which could have been used for other purposes.

3) Insurance cost

4) Cost of spoilage in handling of materials.

EOQ Assumptions: there are only ordering and carring costs

• Purchase costs per unit are unaffected by the quantity ordered
• there are no stock-outs quality remains identical  
• The same quantity is ordered at each reorder point.

E.g., no volume discounts

Demand ,purchase-order lead time, ordering costs , and carrying costs are known with certainty.   tthank you