The
purpose of the EOQ model is simple, to find that particular
quantity to order which minimizes the total variable costs of
inventory.
Excel Spreadsheet Template for Economic order quantity (EOQ). The basic EOQ
model in finds that particular quantity to order which
minimizes the total variable costs of inventory.
Total
variable costs are usually computed on an annual basis and
include two components, the costs of ordering and holding
inventory. Annual ordering cost is the number of orders placed
times the marginal or incremental cost incurred per order. T
his incremental cost includes several components: the costs of
preparing the purchase order, paying the vendor's invoice, and
inspecting and handling the material when it arrives. It is
difficult to estimate these components precisely but a
ball‑park figure is good enough. The EOQ is not especially
sensitive to errors in inputs.
Why don't we include the purchase cost of the inventory in
this calculation? It is not a variable cost. We have to
purchase the inventory in any event. The problem is to
minimize those costs that vary with the quantity purchased at
one time.
