Home » Explanations » Cost Accounting » Material Costing »

Economic Order Quantity (EOQ): Practical Problems and Solutions

Economic Order Quantity

(EOQ): Practical Problems
and Solutions
Written by True Tamplin, BSc, CEPF®

Updated on September 17, 2021

Problem 1
The John Equipment Company estimates its carrying cost

at 15% and its ordering cost at $9 per order. The estimated

annual requirement is 48,000 units at a price of $4 per unit.

Required:
 1. What is the most economical number of units to

order?
2. How many orders should be placed in a year?

3. How often should an order be placed?

Solution

1. What is the most economical number of units to order?

Annual requirement = 48,000 units

Ordering cost = $9 per order

Carrying cost = 15% of per-unit cost

Per unit cost = $4 per unit
2. How many orders should be placed in a year?
= Annual requirement / EOQ

= 48,000 units / 1,200 units

= 40 orders

3. How often should an order be placed?

Frequency of orders = No. of days in one year / No. of

orders
= 360 days / 40 orders

= 9 days

Problem 2
To date, Raymond Bro. has been purchasing an item in lots

of 900 units. This equates to a three-month supply. The

cost per unit is $12, the order cost is $16 per order, and the
carrying cost is 25%.

Required: How much can Raymond Bro. save per year by

purchasing the item in the most economical quantities?

Solution
The first stage in our working is to compute the annual

requirement.

Given that 900 units amounts to a three-month supply, the

monthly requirement is 900 units / 3 months = 300 units.

Therefore, the annual requirement is 300 units x 12 months

= 3,600 units.
In turn, the EOQ can be computed as follows:

No. of Orders = 3,600 units / 900 units

= 4 orders

= 3,600 units / 196 units

= 18 orders approx.
Ordering Cost = 4 orders x $16 per order

= $64
Also, in the case of EOQ:

= 18 orders x $16 per order

= $288
Average Inventory = 900 units / 2

= 450 units
In the case of EOQ:
= 196 units / 2

= 98 units
Carrying cost = $3 x 450 units
= $1,350

In the case of EOQ:

= $3 x 98 units

= $294
Total cost = $64 + $1,350
$1,414

In the case of EOQ:

=$288 + $294
= $582

Saving = $1,414 – $582

= $832
Problem 3
A manufacturing company places a semi-annual order of
24,000 units at a price of $20 per unit. Its carrying cost is

15% and the order cost is $12 per order.

Required:

1. What is the most economical order quantity?

2. How many orders need to be placed?

Solution
No. of orders per year = Annual Requirement / EOQ

= 48,000 units / 620 units

= 77 orders approximately

To compute the annual requirement:

24,000 units are ordered semiannually, therefore:
Annual requirement = 24,000 units x 2 = 48,000 units.

Keep Learning

What a brain exercise that was! Interested to know more

about this topic? We’re happy to connect you to a financial

advisor in Lake Mary, FL. But if you live outside the locale,

fret not. Check on our financial advisor page to learn which

areas we are currently working with.

Frequently Asked Questions

What is the Economic Order Quantity (EOQ)
formula?

EOQ stands for economic order quantity. The formula is:

EOQ = √ (2xARxOC) / CC where AR = annual requirements,

OC = per unit cost, and CC = carrying cost per unit per year

of materials inventory

What does “efficient” mean? Explain why it is

so helpful in business.
Efficient means to use the minimum resources to achieve a
goal. In this case, it means minimizing your inventory

amount. It is helpful because it decreases the money you

spend on holding inventory, and lowers the risk of not

having enough inventory if a sudden increase was to

happen.

What are some examples of Economic Order

Quantity (EOQ) applications in real life?

Clothing stores order a certain amount in inventory at a

time to save on costs. A clothing store, for example, has an

EOQ of 10 and sales are going well. If the owner wanted to

make more money or generate more sales, they would

increase that EOQ amount so they won’t have to keep

placing orders as often, saving them time and money in the

process.

What are the advantages of calculating

Economic Order Quantity (EOQ)?

It minimizes carrying costs and saves time. You can also

save a substantial amount of money using this method

since you would not have to place as many orders reducing

supplier lead time

What are the disadvantages of calculating

Economic Order Quantity (EOQ)?

EOQ does not account for seasonal or economic

fluctuations which can cause huge differences in your

inventory levels. It does not take into account the random

nature of demand.

Related Posts

Material Costing: Practical Problems and Solutions

Cost Center and Cost Unit

Marginal Costing: Practical Questions and Solutions

Flexible Budget Practical Problems and Solutions

Economic Order Quantity (EOQ)

About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of

UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), a

member of the Society for Advancing Business Editing and

Writing, contributes to his financial education site, Finance

Strategists, and has spoken to various financial

communities such as the CFA Institute, as well as

university students like his Alma mater, Biola University,

where he received a bachelor of science in business and

data analytics.
To learn more about True, visit his personal website, view

his author profile on Amazon, his interview on CBS, or

check out his speaker profile on the CFA Institute website.

Facebook
LinkedIn

Instagram

Twitter
YouTube

Search...

Learn the Basics of

Accounting for Free
Financial Accounting
Accounting Concepts & Principles

Accounting Ratios
Cash Book

Adjusting Entries

Bank Reconciliation Statement

See All →
Cost Accounting
Cost Accountancy

Analysis of Cost

Material Costing

Labor Costing

Overhead Costing

See All →
Management Accounting
Cash Management

Cost Audit

Management Audit

Fund Flow Statement

Control Ratios
See All →
Cost Accounting MCQs
Process Costing
Product Costing System

Standard Costing

Variable Costing

Inventory Management

See All →
MCQs Quiz
Accounting Equations

General Journal

Cash Book

Trial Balance

Financial Statements

See All →
Short Questions
Introduction to Accounting

Special Journal

Non-Trading Concerns

Manufacturing Accounts
Transaction Analysis

See All →
 Run a Finance Blog?
See How You Can Partner
With Us
Contact Us

Contact Us Privacy Policy Terms of Use Sitemap

Disclaimers:

Content sponsored by Carbon Collective Investing, LLC, a registered investment

adviser. Registration with the SEC does not imply a certain level of skill or training.
Please refer to our Customer Relationship Statement and Form ADV Wrap program
disclosure available at the SEC's investment adviser public information website:
CARBON COLLECTIVE INVESTING, LLC - Investment Adviser Firm (sec.gov).

The articles and research support materials available on this site are educational and
are not intended to be investment or tax advice. Carbon Collective does not make any
representations or warranties as to the accuracy, timeliness, suitability, completeness,
or relevance of any information prepared by any unaffiliated third party, whether linked
to Carbon Collective’s web site or incorporated herein, and takes no responsibility
therefor. All such information is provided solely for convenience purposes only and all
users thereof should be guided accordingly.

Investments in securities: Not FDIC Insured • No Bank Guarantee • May Lose Value.
Investing in securities involves risks, and there is always the potential of losing money
when you invest in securities. Before investing, consider your investment objectives and
Carbon Collecti e's charges and e penses Carbon Collecti e's internet based ad isor
Carbon Collective's charges and expenses. Carbon Collective's internet-based advisory
services are designed to assist clients in achieving discrete financial goals. They are
not intended to provide comprehensive tax advice or financial planning with respect to
every aspect of a client's financial situation and do not incorporate specific investments
that clients hold elsewhere. For more details, see our Form CRS, Form ADV Part 2 and
other disclosures. Past performance does not guarantee future results, and the
likelihood of investment outcomes are hypothetical in nature. Not an offer, solicitation
of an offer, or advice to buy or sell securities in jurisdictions where Carbon Collective is
not registered.

Copyright © 2021 Finance Strategists