Economic Order Quantity (EOQ) Calculator

If you are an inventory management expert, you might be running calculations based on economic order quantity every day. Use our EOQ calculator and save yourself the hassle of calculating it by hand!

This simple tool will help you figure out how many units of a product you need to order from a supplier to minimize the total cost. It is also useful for businesses that are selling products and need to figure out how many units to order and for how long to keep the inventory for optimal revenue and profit.

Keep reading to reveal the important facts about economic order quantity. In this article, we will cover the EOQ formula, EOQ definition, and more. Ultimately, it should help you maximize your profits and take your inventory management to the next level.

What Is Economic Order Quantity (EOQ)?

Economic Order Quantity (EOQ) is a measure of how many units to order from a supplier or manufacturer at one time in order to minimize the total cost of ordering. In other words, it is the number of units that should be ordered to minimize the cost of ordering.

The Economic Order Quantity Model is created with the assumption that the expenses are related to holding and ordering products that are kept in inventory. Therefore, the economic order quantity can be regarded as a ratio between the amount of inventory you need to keep and the amount of demand. With the help of the economic order quantity model, you’ll be able to predict orders down the road and end up keeping optimally managed inventory.

The EOQ value can make it easy to determine how many units should be ordered at a time. The goal is to cut costs while keeping inventory turnover optimized at the same time. That will eventually help you increase the profitability of your company. So, in addition to managing your inventory, the EOQ model can play a role in managing the cash flow of your company.

Why Is EOQ Important and Who Needs This Calculator?

As we have mentioned above, the EOQ calculator is a tool that is used by businesses to figure out how many units of a product they need to order from a supplier so as to minimize the total cost. This handy tool can help maintain these expenses as low as possible. The EOQ calculator is a useful tool for businesses selling products. It can help them find out how many units should be ordered and for how long to keep the inventory for optimal revenue and profit.

While this metric can be used for determining many different things, it is primarily intended to help you place the optimal order and thus reduce inventory-related expenses such as ordering and holding costs. If you run a business, you should always strive to cut your costs, thereby maximizing your profits.

The cost of ordering is determined by the fixed cost of placing an order and the variable cost per unit, which is a function of how many units are ordered. A company should order more than EOQ to avoid shortages and stock-outs. When the products are ordered and not used immediately, then it is necessary to store them in a warehouse. This may cost a lot of money!

When running out of products, you are at the risk of losing customers or clients. That’s why it is important to operate by maintaining a well-balanced inventory all the time if you want to maximize your profit. Running a business with minimal costs is challenging, though. This is where EOQ comes in useful!

How to Calculate Economic Order Quantity?

Now it’s time to see how EOQ is calculated. Before we delve into the calculation, you need to ask yourself the following questions:

• What is the product in question?
• How does this product contribute to society?
• Why is there a need for this product in society?
• Who are the target markets for this product?

In order to calculate economic order quantity, you need to gather a lot of data, including:

• Annual demand for the product – First, you need to have a good idea of how many products are demanded yearly. In particular, it refers to the product for which you need to calculate EOQ. Check whether the annual demand for the product is increasing or decreasing.
• Holding cost – Next, you should determine the holding cost before calculating the economic order quantity. It is the cost of keeping products (1 unit of the product) in inventory. That said, the holding cost is measured as a percentage of the value of an item that is held in inventory. It can also be calculated from the total inventory costs and the number of units in stock.
• Order cost – As the name suggests, it is the price you have to pay for the product when ordering it. This includes shipping and handling costs, which are the costs of getting the product from its manufacturer to your home or business. It does not include taxes or duties that may be payable on the importation of goods into a country. Hence, order cost can be defined as the amount a customer has to pay for a product before it’s delivered.
• Ordering & holding costs – You also need to know the holding and ordering costs when calculating economic order quantity. Keep in mind that these costs tend to change over time.

EOQ Formula & Example

Once you’ve gathered all the data needed, you are ready to apply the EOQ formula! It is quite easy. All you need to do is input data into the following formula:

EOQ = (2 * Demand * Order costs / Holding costs)^0.5

Example

Let’s say you own a company and sell tablets. We will assume that 500,000 units of this product are demanded annually. If the order costs (the cost per order) is $2,000 while the yearly cost of holding is $100, then economic order quantity will be as follows:

EOQ = (2 * 500,000 * 2,000 / 100) ^0.5

EOQ = 20,000,000 ^0.5

EOQ = 4,472.14 units

Based on the data in our example, it is necessary to order 4,472 units to ensure that inventory expenses are kept at their lowest. After optimizing your inventory costs, you might want to reconsider the pricing policy of the product and make changes as needed. Best of luck to you!