Formula of the Economic Order Quantity

The formula that is used to calculate the economic order quantity is as follows:

EOQ = \(\sqrt{\frac{2DS}{H}}\)

Here, D = The annual demand in units,
S = The order cost, and
H = The holding costs per unit annually.

For example, suppose there is a firm holding inventories of a certain raw material. The previous year’s demand was 2000 units. The average cost for a particular order was $1,000. On this order, the business has to incur the holding cost as well, which is $2 per unit of the product.

To calculate the EOQ, we use the following formula:

EOQ = \(\sqrt{\frac{2DS}{H}}\)

= \(\sqrt{\frac{2~x~2000~x~1000}{2}}\)

= \(\sqrt{2000000}\)

= 1,414 units