# Economic Order Quantity - EOQ

## What is an 'Economic Order Quantity - EOQ'

An economic order quantity (EOQ) is an inventory-related equation that determines the optimum order quantity that a company should hold in its inventory given a set cost of production, demand rate and other variables. This is done to minimize variable inventory costs. The full equation is as follows:

where :
S = Setup costs
D = Demand rate
P = Production cost
I = Interest rate (considered an opportunity cost, so the risk-free rate can be used)

Next Up

## BREAKING DOWN 'Economic Order Quantity - EOQ'

The EOQ formula can be modified to determine production levels or order interval lengths, and is used by large corporations around the world, especially those with large supply chains and high variable costs per unit of production.

Despite the equation's relative simplicity by today's standards, it is still a core algorithm in the software packages that are sold to the largest companies in the world.

RELATED TERMS
1. ### Variable Cost

A corporate expense that varies with production output. Variable ...
2. ### Variable Cost Ratio

Variable costs expressed as a percentage of sales. The variable ...
3. ### Perpetual Inventory

A method of accounting for inventory that records the sale or ...
4. ### Carrying Cost Of Inventory

This is the cost a business incurs over a certain period of time, ...
5. ### Operating Cost

Expenses associated with the maintenance and administration of ...
6. ### Unit Cost

The cost incurred by a company to produce, store and sell one ...
Related Articles
1. Investing

### Understanding Economic Order Quantity

Economic order quantity is an inventory-related equation that determines the optimum order quantity that a company should hold in its inventory.
2. Markets

### Understanding Marginal Cost of Production

Marginal cost of production is an economics term that refers to the change in production costs resulting from producing one more unit.
3. Investing

### Explaining Carrying Cost of Inventory

The carrying cost of inventory is the cost a business pays for holding goods in stock.
4. Markets

### Explaining Quantity Demanded

Quantity demanded describes the total amount of goods or services that consumers demand at any given point in time.
5. Investing

### What is Involved in Inventory Management?

Inventory management refers to the theories, functions and management skills involved in controlling an inventory.

### What Are The Different Types Of Costs In Cost Accounting?

Cost accounting measures several different types of costs associated with a company’s production processes.
7. Investing

### How to Analyze a Company's Inventory

Discover how to analyze a company's inventory by understanding different types of inventory and doing a quantitative and qualitative assessment of inventory.
8. Investing

### Understanding Periodic Vs. Perpetual Inventory

An overview of the two primary inventory accounting systems.
9. Investing

### Inventory Valuation For Investors: FIFO And LIFO

We go over these methods of calculating this component of the balance sheet, and how the choice affects the bottom line.
10. Investing

### Days Sales of Inventory

Days Sales of Inventory, also called Days Inventory Outstanding, is a key financial measurement of a company's performance pertaining to inventory management. In simple terms, it tells how many ...
RELATED FAQS
1. ### How is the economic order quantity model used in inventory management?

Understand what types of costs make up total inventory costs, and learn how the economic order quantity model is used to ... Read Answer >>
2. ### How can Economic Order Quantity be used to lower inventory costs?

Learn what economic order quantity is, how it is calculated and how to find the optimal economic order quantity to minimize ... Read Answer >>
3. ### How does economic order quantity assist a company with maximizing profits?

Understand how economic order quantity minimizes overall inventory costs to maximize profits. Learn what specific types of ... Read Answer >>
4. ### What is the difference between direct costs and variable costs?

Learn about variable costs and direct costs, how direct costs and variable costs are classified and the differences between ... Read Answer >>
5. ### Is it better for a company to have fixed or variable costs?

Understand the difference between a fixed cost and a variable cost, and learn how a company benefits from having more fixed ... Read Answer >>
6. ### How are fixed costs treated in cost accounting?

Learn how fixed costs and variable costs are used in cost accounting to help a company's management in budgeting and controlling ... Read Answer >>
Hot Definitions
1. ### Put Option

An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security ...
2. ### Frexit

Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
3. ### AAA

The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
4. ### GBP

The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
5. ### Diversification

A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
6. ### European Union - EU

A group of European countries that participates in the world economy as one economic unit and operates under one official ...