Methods of

Computing
Economic Order
Quantity
1. Tabular Method
 Under this method, several purchase
order quantity alternatives are listed
in separate columns. Total inventory
cost showing both carrying and
ordering costs are calculated
alternative. The column with the
lowest total amount of inventory cost
will be the economic order quantity
Order size No. of Total Average Total Total order
orders Order Cost Inventory Carrying & carrying
Cost cost
100 100 Php 1, 000 50 Php 40 Php 1, 040
300 33 330 150 120 450
500 20 200 250 200 400
700 14 140 350 280 420
900 11 110 450 360 470

EOQ= 500 units (order size where total costs =400)

Order size = number of units per

order
No. of orders = 10, 000/order size
Total Order cost = No. of orders x
Php10 per order
Average inventory = Order Size/2
2. Formula Method
The formula method is easy to use and it
produces an exact figures. The formula that can
be used is:
2𝐶𝑁
𝐸𝑂𝑄 =
𝐾

EOQ= economic order quantity

C= Cost of placing an order
N= number of units required annually
K= carrying cost per unit of inventory
ILLUSTRATIVE PROBLEM 1
To Illustrate the application of the formula, let assume the following:
Number of units of materials required annually 10,000
Cost of placing an order Php 10.00
Annual carrying cost per unit of inventory Php 0.80

2 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑜𝑟𝑑𝑒𝑟 (𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑎𝑛𝑛𝑢𝑎𝑙𝑙𝑦)

𝐸𝑂𝑄 =
𝑐𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

2 𝑃ℎ𝑝 10 (10,000)
=
𝑃ℎ𝑝 0.80

𝑃ℎ𝑝 200,000
=
𝑃ℎ𝑝 0.80

= 250,000

= 500 units
 Order Point- once the economic order quantity has been determined,
management must decide when to place the order, the order must
be established. If the lead time and the inventory usage rate are
known, determination of the order point is easy. Lead time is the period
between the placement of the order and receipt of the materials
ordered. Inventory usage rate is the quantity of materials used in
production over a period of time. The order point should be where the
inventory level reaches the number of unit that would be consumed
during the lead
ILLUSTRATIVE time.2
PROBLEM
Assume that the expected daily usage of an item of materials is 100 units and the
anticipated lead timeis 4 days.. The following calculation shows that the order point is
400 units.

Orderpoint = 100 units (daily usage) x 4 days (lead time)

= 400 units
When the inventory level of materials is reduced to 400 units, an order should be placed
for 500 units (the EOQ)
 Safety Stock
Since it is almost impossible to estimate lead time and
average usage rate with the accuracy, many companies
prefer to carry a safety stock ( or additional inventory ) as a
cushion against possible stockouts. In such a case, the order
point is computed by adding the safety stock to the estimate
usage during the lead time. A safety stock calculation should
arrive at a figure which properly balances the risk of a
stockout against the additional carrying cost incurred by the
extra inventory.
ILLUSTRATIVE PROBLEM 3
Assume the use of same data as in the computation of the order
point above (without the safety stock), the revised order point maybe
computed as follows assuming safety stock of 800 units.

100 units (daily usage) x 4 days (lead time) 400 units

Safety stock 800 units
Revised order point 1 200 units
ILLUSTRATIVE PROBLEM 4
A television manufacturer buys wooden cabinet from outside
suppliers at Php 400 per set. Total annual needs are 5,000 units at a
rate of 20 sets per working day. The following cost data are
available
Desired annual return on the inventory investment (10 % x 400)
P 40
Rent, Insurance, taxes per unit per year
10
Carrying cost per unit per year P
50

Requirements:
1. What is the economic order quantity?
2. Compute for
SOLUTION TO ILLUSTRATIVE PROBLEM 4
2 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑜𝑟𝑑𝑒𝑟 (𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑎𝑛𝑛𝑢𝑎𝑙𝑙𝑦)
𝐸𝑂𝑄 =
𝑐𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

2 𝑃ℎ𝑝 50 (5,000)
=
𝑃ℎ𝑝 50

𝑃ℎ𝑝 500,000
= 𝑃ℎ𝑝 050

= 10,000

= 100 units
5,000
2. a) Annual ordering cost = x 50 = Php 2,500
100

100
b) Annual carrying cost = x 50 = Php 2,500
2
BUSINESS PAPERS USED TO SUPPORT
MATERIAL TRANSACTIONS
1. PURCHASE REQUSITION- Is a written request, usually sent
to inform the purchasing department of a need for
materials or supplies. The purchase requisition is usually
preprinted according to the specifications of a particular
company. Most forms usually include the requisition (serially
numbered) name of the department or individual making
the request, quantity of items requested, description of the
item, unit price, order data, required delivery date, and
authorized signature.
2. PURCHASE ORDER- is a written request to supplier for
specified goods at an agree upon the price. The request
also stipulates terms of delivery and terms of payment.
The purchase order is the supplier’s authorization to
deliver goods and submit a bill.
3. RECEIVING REPORT- When the goods that were ordered are
delivered, the receiving department will unpack and count them. It
is interesting to note that the quantity ordered is not shown on the
copy of the purchase order sent to receiving department. This
deliberate omission ensures that the goods delivered are actually
counted. The goods are checked to be sure that they are not
damaged and that they meet the specifications of the purchase
order.
4. MATERIALS REQUISITION SLIP- a written order to the storekeeper to
deliver materials or supplies to the place designated or to issue the
materials to the person presenting a properly executed requisition.
Each material requisition form shows the job number or department
requesting the goods, their quantity and description , and the unit
cost and total cost of the goods issued. The cost that is entered on
the materials requisition is the amount charged to production for
materials consumed.