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Carrying costs however increase with increases in the

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Unformatted text preview: l cost of having funds invested in inventory. These costs are stated in dollars per unit per period. Order costs decrease as the size of the order increases. Carrying costs, however, increase with increases in the order size. The EOQ model analyzes the tradeoff between order costs and carrying costs to determine the order quantity that minimizes the total inventory cost. Mathematical Development of EOQ A formula can be developed for determining the firm’s EOQ for a given inventory item, where S O C Q usage in units per period order cost per order carrying cost per unit per period order quantity in units The first step is to derive the cost functions for order cost and carrying cost. The order cost can be expressed as the product of the cost per order and the number of orders. Because the number of orders equals the usage during the period divided by the order quantity (S/Q), the order cost can be expressed as follows: Order cost O S/Q (14.4) The carrying cost is defined as the cost of carrying a unit of inventory per period multiplied by th...
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