How the System Calculates the Economic Order Quantity

The formula for the Economic Order Quantity (EOQ) is:

Square root of (24* Monthly Demand of Product * Acquisition Cost) / (Carrying Cost * Cost of Product)

Important: The system uses the REP-COST is recorded in Price Line Maintenance. If there is no REP-COST recorded, then the system uses the value listed in the Basis Line #6 on the Price Line Maintenance window.

If both the REP-COST and the Basis Line #6 are blank, the system uses a zero (0) value. So, you must ensure that you have a value in one of the two fields in Price Line Maintenance.

Example

Product A has a demand per month of 5 and a unit cost of $12.00. The cost of processing a purchase order has been determined to be $1.75 and the cost of carrying the item in inventory is 30%.

In the above example, considering the cost of processing a purchase order and the cost of carrying the item in inventory, the most cost-effective quantity of Product A to order at one time is 8 units.