Definition: Economic Order Quantity (EOQ) is the optimal quantity of goods that should be ordered at once to minimize the total cost of inventory.


EOQ = √((2 x O x D)/C)

where,
O = Ordering cost per order
D = Annual demand or usage
C = Carrying cost per unit per year


Given,
Annual usage (D) = 4000 units
Ordering cost (O) = Rs.80
Carrying cost (C) = Rs.4 per year

Substituting the values in the formula, we get:

EOQ = √((2 x 80 x 4000)/4) = √(640000) = 800 units

Therefore, the optimal quantity to be ordered at once is 800 units.


EOQ is a widely used inventory management technique that helps businesses to determine the optimal quantity of goods that should be ordered at once to minimize the total cost of inventory. The formula takes into account the cost of ordering and carrying inventory. Ordering cost includes expenses related to processing orders, such as purchase order processing, transportation, and handling. Carrying cost includes expenses related to storing inventory, such as rent, insurance, and obsolescence.

The EOQ formula assumes that demand is constant and known with certainty, ordering cost per order is constant, and carrying cost per unit per year is constant. These assumptions may not hold true in real-world scenarios, but EOQ is still a useful tool for inventory management.

By using EOQ, businesses can reduce the total cost of inventory by ordering the optimal quantity of goods at once. Ordering too much inventory can lead to increased carrying costs, while ordering too little can lead to frequent orders and increased ordering costs. EOQ helps businesses strike a balance between these costs and optimize their inventory management.