Assumptions of EOQ model


2

The EOQ can be calculated with the help of a mathematical formula. Following assumptions are implied in the calculation:

  1. Constant or uniform demand– although the EOQ model assumes constant demand, demand may vary from day to day. If demand is not known in advance- the model must be modified through the inclusion of safe stock.
  2. Constant unit price– the EOQ model assumes that the purchase price per unit of material will remain unaltered irrespective of the order offered by the suppliers to include variable costs resulting from quantity discounts, the total costs in the EOQ model can be redefined.
  3. Constant carrying costs– unit carrying costs may very substantially as the size of the inventory rises, perhaps decreasing because of economies of scale or storage efficiency or increasing as storage space runs out and new warehouses have to be rented.
  4. Constant ordering cost– this assumption is generally valid. However any violation in this respect can be accommodated by modifying the EOQ model in a manner similar to the one used for variable unit price.
  5. Instantaneous delivery– if delivery is not instantaneous, which is generally the case; the original EOQ model must be modified through the inclusion of a safe stock.
  6. Independent orders– if multiple orders result in cost saving by reducing paper work and the transportation cost, the original EOQ model must be further modified. While this modification is somewhat complicated, special EOQ models have been developed to deal with it.

These assumptions have been pointed out to illustrate the limitations of the basic EOQ model and the ways in which it can be easily modified to compensate for them.

The formula for the EOQ model is:

 

2 M Co

S Cc

 

Where M = is the annual demand

Co is the cost of ordering

Cc is the inventory carrying cost

S = is the unit price of an item.

 


Like it? Share with your friends!

2
BMS Team

We, at BMS.co.in, believe in sharing knowledge and giving quality information to our BMS students. We are here to provide and update you with every details required by you BMSites! If you want to join us, please mail to [email protected].

369 Comments


Warning: Undefined array key "html5" in /home/bmsnewco/public_html/wp-content/plugins/facebook-comments-plugin/class-frontend.php on line 140

Facebook comments:

This Website Is For Sale. Email us an offer we cannot refuse on [email protected] :)

X
Choose A Format
Personality quiz
Series of questions that intends to reveal something about the personality
Trivia quiz
Series of questions with right and wrong answers that intends to check knowledge
Poll
Voting to make decisions or determine opinions
Story
Formatted Text with Embeds and Visuals
List
The Classic Internet Listicles
Countdown
The Classic Internet Countdowns
Open List
Submit your own item and vote up for the best submission
Ranked List
Upvote or downvote to decide the best list item
Meme
Upload your own images to make custom memes
Video
Youtube and Vimeo Embeds
Audio
Soundcloud or Mixcloud Embeds
Image
Photo or GIF
Gif
GIF format