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EOQ Model Total Cost Formula:
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The Total Cost of Inventory in the EOQ (Economic Order Quantity) model represents the sum of all costs associated with maintaining and ordering inventory. It helps businesses optimize their inventory management strategies to minimize overall costs.
The calculator uses the EOQ total cost formula:
Where:
Explanation: The formula calculates the comprehensive cost of inventory management by summing holding costs (storage, insurance), ordering costs (processing, shipping), and purchase costs (actual item cost).
Details: Accurate total cost calculation is essential for inventory optimization, cost reduction, and efficient supply chain management. It helps determine the optimal order quantity that minimizes total inventory costs.
Tips: Enter holding cost in currency per year, ordering cost in currency per order, and purchase cost in currency. All values must be non-negative numbers.
Q1: What is included in holding costs?
A: Holding costs typically include storage fees, insurance, taxes, obsolescence, and opportunity cost of capital tied up in inventory.
Q2: What constitutes ordering costs?
A: Ordering costs include purchase order processing, shipping fees, inspection costs, and any administrative expenses related to placing orders.
Q3: How does this differ from EOQ calculation?
A: This calculates total cost for given values, while EOQ finds the optimal order quantity that minimizes total cost based on demand and cost parameters.
Q4: When should this calculation be used?
A: Use for inventory cost analysis, budgeting, supplier evaluation, and when making decisions about order quantities and inventory levels.
Q5: Are there limitations to this model?
A: Assumes constant demand, fixed costs, and instant delivery. May not account for quantity discounts or seasonal fluctuations.