Economic Order Quantity

Topics: Cost, Costs, Economic order quantity, Inventory, Variable cost, Economics of production / Pages: 9 (2031 words) / Published: Nov 4th, 2012

1. Executive Summary -03

2. Introduction -03

3. Objective of study -06

4. Research Methodology -06

5. Analysis and interpretation of data -07-13

6. Conclusion -13

7. References -15

Inventory management is big issue today, it gives one company competitive edge over other companies. The word inventory refers to any kind of resource having economic value and is maintained to fulfill the present and future needs of an organization. Fred hansman defined inventory as an idle resource of any kind provided such a resource has economic value. Inventory of resources is held to provide desirable service to customers and to achieve sales turnover target. Investment in large inventories adversely affects firm’s cash flow and working capital as investment in inventory represents substantial portion of total capital investment in any business. It is in therefore essential to balance the advantage of having inventory of resources and the cost of maintain it so as to determine an optimal level of inventory of each resource so that total inventory cost is minimum. Holding of stock is expensive so controls are needed to ensure that stock level remains as low as possible. Stocks should be controlled using rational policies to balance between holding cost and demand. One such policy is ordering ECONOMIC ORDER QUQNTITY for stock replenishment at this point holding cost reduces significantly and total annual inventory cost is lowest. Though maintaining exact EOQ is sometime not possible working in the vicinity of it results in lower total annual inventory cost. Holding cost is straight line that is it directly varies with ordering quantity

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