Which formula is used to calculate EOQ?

The formula for calculating the Economic Order Quantity (EOQ) is derived from the need to minimize the total inventory costs, which include ordering costs and holding costs. The correct formula, Sqrt(2DS/H), captures this relationship effectively.

In this formula:

• D represents the demand rate, usually expressed as the quantity of units sold annually.
• S is the ordering cost per order, which includes all costs associated with the process of ordering inventory.
• H denotes the holding cost per unit per year, which includes costs such as storage, insurance, and spoilage.

The formula suggests that the EOQ is the square root of the quantity derived from multiplying twice the demand (2D) by the ordering cost (S) and dividing by the holding cost (H). The square root is essential because it reflects the trade-off between ordering smaller quantities more frequently (which increases ordering costs) and ordering larger quantities less often (which increases holding costs). By finding the EOQ, a company can determine the optimal order size that minimizes total inventory costs.

This concept is foundational in inventory management and helps businesses maintain an efficient operation by balancing the costs associated with inventory acquisition and storage.