EOQ and EBQ

Question 1

define Inventory profile

Answer 1

a visual representation of the inventory level over time.

Question 2

The economic order quantity (EOQ) approach

Answer 2

approach to decide how much of any particular item to order when stock needs replenishing .

Question 3

how are holding costs taken into account?

Answer 3

including:
○ working capital costs
○ storage costs
○ obsolescence risk costs

Question 4

how are order costs taken into account?

Answer 4

○ cost of placing the order (including transportation of items from suppliers if relevant);

○ price discount costs.

Question 5

Holding costs equation

Answer 5

Holding costs = Holding cost x Average inventory
= Ch x Q
2

Question 6

Ordering costs equation

Answer 6

Ordering costs = Ordering cost x number of orders per period
= Co x D/Q

Question 7

notes about using the EOQ

Answer 7

Time between orders = EOQ/D

Order frequency = D/EOQ per period

Question 8

EOQ equation

Answer 8

sqr (2CoD/ Ch)

Question 9

EBQ equation

Answer 9

sqr [2CoD/ Ch(1-D/P)]

Question 10

What is EOQ +EBQ used for?

Answer 10

illustrate how much should be ordered and when

Question 11

EOQ and EBQ define

Answer 11

quantity that minimises the total cost

Question 12

EOQ vs EBQ

Answer 12

EOQ = immediate and full replacement
usually external supplier

EBQ = gradual replacement
usually Internal supplier

Question 13

what does the EOQ formula tell us?

Answer 13

• The greater the cost of ordering, the greater the suggested order size.
• The greater the cost of inventory, the lower the suggested order size.
• The greater the demand, the greater the suggested order size, as you may easily understand
• The cost of supply (P*D) does not play any role in the identification of the EOQ. it pushes the total cost up or down - but does not affect the slope of the curve.