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Economic Order Quantity - Assignment Example

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It determines the most economical quantity to purchase per order taking into consideration the prevailing ordering costs as well as the holding costs. To minimize ordering costs and take advantage of discounts associated with…
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Economic Order Quantity
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Finance and Accounting of Advantages of EOQ The EOQ model minimizes storage and carrying costs. It determines themost economical quantity to purchase per order taking into consideration the prevailing ordering costs as well as the holding costs. To minimize ordering costs and take advantage of discounts associated with bulk buying, the model would suggest large quantities but in few orders. On the other hand, the model may suggest smaller quantities in more orders to minimize the carrying costs. The model also provides information that is specific to a business regarding the re-order levels, the order quantities as well as the inventory to hold. The result of such specificity is that there is a smooth re-stocking process that enhances customer service as stock-outs are minimized.
Disadvantages
The EOQ model involves the use of mathematical calculations which may at times be complicated for small business owners that may lack in math skills. It also requires data that has sufficient detail. The basis of the model is the assumption that the pattern of demand would be constant throughout the year and inventory usage is at a fixed rate. It fails to account for fluctuations. The assumption that costs remain constant is also faulty as the costs vary depending on the economic situation. It also limits how a business can take advantage of discounts that suppliers offer on quantity purchases. That is because it offers the ordering of similar amounts every time.
References
Finkler, S. A., Purtell, R.M., Calabrese, T.D., & Smith, D.L. (2013). Financial management for public, health, and not-for-profit organizations (4th ed.). Upper Saddle River, NJ: Pearson Prentice Hall. Read More
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