Economic Order Quantity (EOQ)

EOQ balances the cost of carrying inventory with the cost of going through a replenishment cycle. EOQ should be used under these conditions:

• The price that is paid to the supplier does not vary when you buy more of the item. There are no price breaks.
• The usage rate of the item is higher than 1/2 units per month.
• The supplier’s lowest permissible purchasing quantity is reasonable for you to attain.

This formula is used when the ordering quantity is calculated using EOQ:

The cost of ordering and the cost of carrying inventory are both set up on the Product Warehouse Description Setup record. If the carrying cost is zero, zero is used, but an exception message is generated when you process Product Administration Month End Processing Report. The product’s unit cost is governed by your selection in SA Administrator Options-Products-Costs. EOQ uses the same cost that you use to update General Ledger and Sales Manager.