Unformatted text preview: der Quantity (EOQ) Model
One of the most common techniques for determining the optimal order size for
inventory items is the economic order quantity (EOQ) model. The EOQ model
considers various costs of inventory and then determines what order size minimizes total inventory cost.
EOQ assumes that the relevant costs of inventory can be divided into order
costs and carrying costs. (The model excludes the actual cost of the inventory
item.) Each of them has certain key components and characteristics. Order costs
include the fixed clerical costs of placing and receiving orders: the cost of writing
a purchase order, of processing the resulting paperwork, and of receiving an
order and checking it against the invoice. Order costs are stated in dollars per
order. Carrying costs are the variable costs per unit of holding an item of inventory for a specific period of time. Carrying costs include storage costs, insurance costs, the costs of deterioration and obsolescence, and the opportunity or 608 PART 5 Short-Term Financial Decisions financia...
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