b) ORDERING COST: These costs are also known as acquisition or setup costs.

They are related to processing and generating an order and connected paperwork. They consist of salaries, to purchasing staff, telex, telegrams. c) STOCK OUT COSTS: They are invisible get important; these costs are incurred by the company. It there is a stock-out-resulting in loss of production. They may be loss of profit on

lost production, loss of goodwill, impact on future stock. The question how much to order, relates to the problem of determining levels of inventories. Bulk buying reduces the frequency of ordering and hence ordering cash. But may result in large inventory, leading to an increase in carrying cost. The determination of EOQ is to balance ordering cost and carrying cost.
Formula:EOQ = 2 AO/C

Where, A = Annual Consumption; O = Ordering cost per unit; C = Carrying cost per unit

E.g.:- Seno Meters limited is mgf. Of Speedo meters for two wheelers. It supplies 20000 speedometers to Yamaha every year. At Yamaha ordering cost comes to Rs.5 and the carrying cost is 2.5% of the average inventory. The price of single unit is Rs. 200. The company presently has a policy to place 10 orders every year. Advice management of Yamaha as to whether to go with same policy or to switch over to EOQ model
Sol: A= 20000; o= Rs.5; c= 2.5% of 200 or Rs.5; price per unit 200/Now 10 orders a year 20000/10 = 2000 units ordered every time Ordering cost 10 X 5 = 50 Carrying cost 2000/2 X 5 = 5000 Total cost = 5000+50= 5050. EOQ = Under root 2Ao/c = 200 units Ordering cost = 20000/200 = 100 orders X5 = 500 Carrying cost = 200/2 X 5 = 500 Total Cost = 1000 Better to go with EOQ model 55