Calculate the annual holding cost if the economic order quantity is used
To calculate the annual holding cost when using the Economic Order Quantity (EOQ) model, you need to consider two main factors: the carrying cost per unit and the EOQ itself.
The formula to calculate the annual holding cost is:
Annual Holding Cost = (EOQ / 2) * Carrying Cost per Unit
Here's how you can calculate it:
Step 1: Determine the EOQ.
The Economic Order Quantity (EOQ) is the optimal order quantity that minimizes total inventory costs. It can be calculated using the following formula:
EOQ = √((2 * D * S) / H)
Where:
D = Demand (annual units sold or used)
S = Ordering cost per order
H = Carrying cost per unit per year
Step 2: Calculate the annual holding cost.
Using the EOQ calculated in step 1, multiply it by half of the carrying cost per unit:
Annual Holding Cost = (EOQ / 2) * Carrying Cost per Unit
For example, suppose the demand is 1,000 units per year, the ordering cost per order is $100, and the carrying cost per unit per year is $2.
Step 1: Calculate the EOQ:
EOQ = √((2 * 1000 * 100) / 2) = √(200,000) ≈ 447.21
Step 2: Calculate the annual holding cost:
Annual Holding Cost = (447.21 / 2) * 2 = 447.21
Therefore, the annual holding cost in this example is approximately $447.21.