Formula and units
Economic order quantity, or EOQ, is the replenishment lot that minimizes the sum of ordering and holding costs in a basic constant-demand model. With annual demand D, fixed cost per order S and annual holding cost per unit H, the formula is Q* = √(2DS/H). Here H is expressed as money per unit per year, not as a percentage without a stated goods value.
Educational example
Educational example: D = 1000 units per year, S = 40 monetary units per order, H = 2 per unit per year. We obtain Q* = 200; five orders cost 200, and holding an average balance of 100 units costs another 200 per year.
Model limits
This is optimal only within the adopted conditions: demand is known and constant, replenishment is instantaneous, and there are no shortages or discounts. A capacity constraint, supplier minimum lot, seasonality or uncertain lead time requires a different problem. The calculation cannot be called a universal purchasing standard, and the time units of the inputs must be consistent.
Further reading and scope
For more on working capital, see the [educational guide](/guides/working-capital/).
Basis: **gl-mit-inventory**. The example is editorial. The sources verify the concept but do not confirm the reliability of anyone’s financial statements or the suitability of a decision for a particular investor.