Economic Order Quantity
  1.The economic order quantity(EOQ) is the order quantity which minimizes inventory costs.The EOQ can be calculated using a table,graph or formula.
  2.Economic order theory assumes that the average inventory held is equal to one half of the reorder quantity.
  3.Example:
  Suppose a company purchases raw material at a cost of $16 per unit.The annual demand for the raw material is 25,000 units,The holding cost per unit is $6.40 and the cost of placing an order is $32.
  We can tabulate the annual relevant costs for various order quantities as follows.
  Notes
  (1)Average inventory=Order quantity÷2(ie assuming no safety inventory)
  (2)Number of orders=annual demand÷order quantity
  (3)Annual holding cost=Average inventory×$6.40
  (4)Annual order cost=Number of orders×$32
  You will see that the economic order quantity is 500 units,At this point the total annual relevant costs are at a minimum.