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
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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