Calculate the economic order quantity (EOQ), the order size that minimizes the combined cost of placing orders and holding stock, plus orders per year and total cost.
What is EOQ?
The economic order quantity is the order size that keeps your total inventory costs as low as possible. Ordering in small batches means many orders and high ordering costs; ordering in huge batches means lots of stock sitting around and high holding costs. EOQ finds the balance point, where yearly ordering cost equals yearly holding cost.
EOQ = √(2 × D × S ÷ H)
- D: annual demand in units
- S: cost of placing one order
- H: cost of holding one unit for a year
Worked example
You sell 12,000 units a year, each order costs $50 to place, and holding one unit for a year costs $2.40. EOQ = √(2 × 12,000 × 50 ÷ 2.40) = 707 units. That means about 17 orders a year, roughly every 21.5 days, with total ordering and holding costs of about $1,697.
Limits of the EOQ model
- It assumes steady demand and fixed costs, which real businesses rarely have exactly.
- It ignores bulk discounts. If a supplier offers a lower price for larger orders, compare the total cost at that quantity too.
- Use it with a reorder point to decide when to order.
Frequently asked questions
How do I estimate holding cost?
Add storage, insurance, shrinkage and the cost of money tied up in stock. Many businesses estimate it at 20% to 30% of the item's cost per year.
Why are ordering and holding costs equal at EOQ?
That is a mathematical property of the model: total cost is lowest exactly where the two costs balance.
Related tools
Results are estimates for planning and education. They are not accounting, tax or legal advice. Check important figures with a qualified accountant.