Report Determination of Economic Order Quantity

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Submitted By Baligasa
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Determination of Economic Order Quantities
Economic order quantity (EOQ) is that size of the order which gives maximum economy in purchasing any material and ultimately contributes towards maintaining the materials at the optimum level and at the minimum cost.
In other words, the economic order quantity (EOQ) is the amount of inventory to be ordered at one time for purposes of minimizing annual inventory cost.
The quantity to order at a given time must be determined by balancing two factors: (1) the cost of possessing or carrying materials and (2) the cost of acquiring or ordering materials. Purchasing larger quantities may decrease the unit cost of acquisition, but this saving may not be more than offset by the cost of carrying materials in stock for a longer period of time.

The Nature of the Problem Certain purchased items in the course of producing goods and services: raw materials, supplies, and purchased parts. Some specific examples would be the coal purchased by an electric utility, the stationary purchased by an educational institution, and the tiles purchased by an automobile manufacturer.
FACTORS AFFECTING ORDER QUANTITIES 1. LARGE ORDER QUANTITIES -the costs that are incurred every time an order is placed; these include the expense of placing order with a supplier, the expense of transporting the order, and the expense of receiving the incoming order. Since the expenses are relatively fixed per order, they provide the organization with an incentive to increase the order size and thereby reduce the number of orders it must place during the given period.
-are likely to be adopted in the presence of available quantity discounts or when indications are that prices will be increase in the near future. - the possibility of an increase in demand for the item serves as an inducement to the order in larger quantities. This is because the…...

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