Economic Order Quantity - EOQ

AAA

DEFINITION of 'Economic Order Quantity - EOQ'

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:

Economic Order Quantity (EOQ)



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)

INVESTOPEDIA EXPLAINS '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. Materials Requirement Planning ...

    One of the first software based integrated information systems ...
  2. Variable Cost

    A corporate expense that varies with production output. Variable ...
  3. Inventory

    The raw materials, work-in-process goods and completely finished ...
  4. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at ...
  5. Supply Chain

    The network created amongst different companies producing, handling ...
  6. Enterprise Resource Planning - ...

    A process by which a company (often a manufacturer) manages and ...
Related Articles
  1. Measuring Company Efficiency
    Fundamental Analysis

    Measuring Company Efficiency

  2. The Working Capital Position
    Investing Basics

    The Working Capital Position

  3. What is the average salary for an accountant?
    Personal Finance

    What is the average salary for an accountant?

  4. Lognormal and Normal Distribution
    Fundamental Analysis

    Lognormal and Normal Distribution

Hot Definitions
  1. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  2. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  3. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  4. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  5. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
  6. Call Risk

    The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem ...
Trading Center