# Economic Order Quantity Calculator

This economic order quantity calculator or EOQ calculator can be used by a business to estimate the unit product quantity a business needs to order from suppliers or batch manufacture in order to minimize its total inventory costs.

Our post on economic order quantity and working capital discusses in more detail how the minimum inventory cost can be calculated and its relationship to working capital.

## Using the Economic Order Quantity Calculator

By entering details relating to the demand for the product, ordering cost, product unit cost, and the holding cost % the economic order quantity calculator can be used to estimate the following.

1. Economic order quantity (EOQ)
2. Holding cost per unit
3. Ordering cost
4. Holding cost
5. Total inventory cost

In addition the calculator provides a graphical representation of the three inventory costs demonstrating that the cost is minimized at the economic order quantity. The EOQ calculator is used as follows.

## Ordering Cost

### 1. Enter the Demand for the Period

Enter the unit demand for the product for the accounting period. The period can be of any length but is normally a month, quarter or year depending on the length of the accounting period under consideration. For example, if the demand for the product is 912 units a year then enter 912.

### 2. Enter the Ordering Cost

Enter the cost of placing one order with the supplier or for a manufacturer, enter the set up costs for a production run.

## Holding Cost

### 3. Enter the Product Unit Cost

Enter the cost for one unit of the product. For example is a product costs 75 to purchase from a supplier or to manufacture enter 75.

### 4. Enter the Holding Cost Percentage

The cost of holding one unit of product for the period is represented as a percentage of its unit cost. So for example if the period (defined in step 1) is a year, the product unit cost is 75 and the holding cost percentage is 40%, it will cost the business 30 (75 x 40%) to hold one unit of the product in inventory for the year.

Further details of the calculation of the holding cost can be found in our economic order quantity post.

The economic order quantity calculator calculates the holding cost per unit.

## Economic Order Quantity (EOQ)

The economic order quantity model calculator calculates the EOQ based on the following formula.

`EOQ = (2 x D x K/h)1/2`
Variables used in EOQ Formula
D = Total demand for the product during the accounting period
K = Ordering cost per order
h = Holding cost per unit

So for example if based on the values entered the calculator shows an EOQ of 76 it means that to minimize inventory ordering and holding costs the business should place orders with suppliers (or for a manufacturer produce in batches of) 76 units.

## Inventory Cost for the Period at EOQ

The calculator calculates the ordering, holding and total inventory cost for the demand period if orders are placed by the business at the EOQ level.

In addition the calculator produces a graph of the three inventory costs over a range of unit quantities to demonstrate that as the number of units per order increases the ordering costs for the period decrease and the holding costs increase.

At the economic order quantity the ordering and holding costs are equal and the total inventory costs are minimized.