Formula
EOQ = √((2 × Annual Demand × Setup Cost) / Annual Holding Cost)
When to Use
Use EOQ when you want to minimize total inventory costs by finding the sweet spot between ordering frequently (high setup costs) and ordering infrequently (high holding costs).
Example
Scenario: A retailer sells 1,000 units per year
Setup cost per order: $50
Annual holding cost per unit: $5
Calculation:
EOQ = √((2 × 1000 × 50) / 5)
EOQ = √(20000)
EOQ ≈ 141.42 units
This means the retailer should order about 141 units at a time to minimize costs.