How to Calculate EOQ with Changing Demand

What is EOQ and how does it impact inventory costs?

Discuss the concept of Economic Order Quantity (EOQ) and its significance in controlling inventory costs.

Answer:

Economic Order Quantity (EOQ) is a formula used by companies to determine the optimal quantity of inventory to order in order to minimize total inventory costs. EOQ helps in balancing the costs of ordering and holding inventory, ensuring that the company maintains an efficient level of inventory.

Explanation:

EOQ takes into consideration the demand for the product, setup costs or ordering costs, and holding costs. By calculating the EOQ, a company can strike the right balance between ordering too much inventory (which increases holding costs) and ordering too little inventory (which leads to stockouts and lost sales).

The EOQ formula is given by: EOQ = sqrt((2 * Demand * Setup Cost) / Holding Cost)

When the demand for a product changes, as in the case mentioned in the data, the EOQ value will also change. This is because the optimal quantity of inventory to order is directly influenced by the demand for the product. When demand increases, the EOQ value typically increases as well.

In the given scenario where the demand changed from 1,000 machines per year to 100 machines per month, the new EOQ would need to be recalculated. By converting the annual demand to monthly demand and plugging it into the EOQ formula, the new EOQ can be determined.

Therefore, it is important for companies to regularly review and adjust their EOQ calculations to align with changing demand patterns and optimize inventory management.