Question

while calculating EOQ carrying cost is taken as​

Answer 1

Introduction:

The economic order quantity (EOQ) is the optimal order amount that a corporation should acquire in order to reduce inventory expenses such as holding costs, shortfall costs, and order charges.

Explanation:

The EOQ model aims to guarantee that the appropriate quantity of inventory is ordered every batch, so that a firm does not have to place orders too frequently and does not have an excess of inventory on hand. It is assumed that there is a trade-off between inventory keeping costs and inventory setup costs, and that total inventory costs are reduced when both setup and holding costs are reduced.

The EOQ would be the lowest of the ordering and carrying costs combined.

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Answer 2

Answer:

When computing EOQ, carrying costs are considered and calculated as-\sqrt{2*AO/C}.

Where-

• A = Consumption of the item (in units) over a year
• O=Cost of placing a single order, including shipping or ordering fees.
• C=Interest payments made on each unit annually, along with additional varying storage costs (carrying cost per unit per annum)

Explanation:

• The amount to be ordered all at once is referred to as the "ordering quantity" and should be chosen carefully.
• If it is small, several orders may need to be placed annually, incurring fees for administrative work, material handling, etc.
• There will also be a loss in terms of cost of transportation and price. Large orders prevent these losses and result in reduced transportation costs and price reductions.
• However, there will be expenses related to storing the money as well as interest payments on the money that is locked up.
• An order shouldn't be too big to require a hefty interest payment, but it should be big enough for the company to receive the correct discounts and benefit from bulk shipping. The formula can be used to determine the ideal quantity to order, or economic order quantity (EOQ), if the price to be paid is stable.

Hence, we can conclude that while calculating EOQ, carrying cost is taken as a percentage of output cost.

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