How it is calculated
Worked example
With 10,000 units a year, $100 per order, a $250 unit cost and a 20% holding rate, H is $50 per unit per year and the EOQ is 200 units: 50 orders a year, $5,000 in ordering cost and $5,000 in holding cost.
Practical tips
- The total cost curve is flat near the EOQ: rounding to a pallet or box quantity costs very little.
- Holding rates of 15–30% of unit cost per year are common; include capital cost, storage, insurance and obsolescence.
- EOQ says how much to order. Use the safety stock calculator to decide when.
Frequently asked questions
What are the assumptions of the EOQ model?
Constant and known demand, a fixed cost per order, a constant holding cost, instant replenishment, no quantity discounts and no stockouts. Real situations differ, but EOQ is still a solid reference point.
What goes into the cost per order?
Everything that happens once per order regardless of quantity: purchasing staff time, issuing the purchase order, fixed freight, receiving, inspection and invoice processing.
Does EOQ work for production batches?
For production, use the closely related EPQ model, which accounts for units being produced gradually rather than arriving all at once. In EPQ, the setup cost replaces the order cost.