WORKING-CAPITAL-MANAGEMENT5 MIN READ
Use EOQ Without Letting the Formula Overrule Reality
Calculate EOQ and identify when working-capital context should modify the order decision.
EOQ = sqrt((2 x demand x order cost) / holding cost) Too many small orders EOQ zone Cash-heavy bulk buy Annual demand is 24,000 units, ordering cost is $120 per order, and holding cost is $3 per unit per year. A supplier proposes a 5,000-unit order for a freight break. EOQ balances ordering cost and holding cost The common trap is treating a supplier price or freight break as automatically good while ignoring average inventory and cash tied up. Step 1 2 x annual demand x order cost = 2 x 24,000 x $120 = $5,760,000 This is the ordering-cost…
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