The latter formula can be used to find the EOQ. For example, say that a painter uses 10 gallons of paint per day at $5 per gallon, and works 350 days per year. Under this scenario, the painter's annual paint consumption (or demand) is 3,500 gallons.
Also assume that the painter incurs holding costs of $3 per gallon per year, and order costs of $1 5 per order. In this case, the painter's optimal order quantity can be found as follows: EOQ the square root of (2 3,500 15)/3 187 gallons.The number of orders is equal to D/Q, or 3,500 / 187. Thus the painter should order 187 gallons about 19 times per year, or every three weeks or so, in order to minimize his inventory costs.
The EOQ will sometimes change as a result of quantity discounts, which are provided by some suppliers as an incentive for customers to place larger orders. For example, a certain supplier may charge $20 per unit on orders of less than 100 units and only $18 per unit on orders over 100 units.To determine whether it makes sense to take advantage of a quantity discount when reordering inventory, a small business owner must compute the EOQ using the formula (Q the square root of 2DS/H), compute the total cost of inventory for the EOQ and for all price break points above it, and then select the order quantity that provides the minimum total cost. For example, say that the painter can order 200 gallons or more for $4.
75 per gallon, with all other factors in the computation remaining the same.
