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Unit 13: Inventory Control
Notes
or T.C.C. =
Where, T.C.C. = Total Carrying Cost
C.C% = Carrying Cost Percentage
P.P. = Purchase Price
Q/2 = Average Quantity
Therefore, the EOQ is a point where the total carrying cost and total ordering cost are at an
equilibrium point. And it is given by a mathematical formula:
E.O.Q. =
Where, O = Ordering Cost per Order
U = Annual Usage
C = Carrying Cost
P = Purchase Price per Unit
A simple derivation of EOQ:
EOQ = CPO/2 = OU/Q
CPQ/2 × OU/Q = CPQ2 = 2OU
Q2 = 2OU/CP
Q =
There are different approaches to study the EOQ concept under two situations, viz.,
1. In the absence of quantity discount
(i) Equational/Mathematical Approach
(ii) Tabular/Trial and Error Approach
(iii) Graphical Approach
2. In the presence of quantity discount
(i) Cost Comparison Approach
(ii) Price-break Approach
Did u know? Inventory has been viewed as a necessary evil (non-earning asset) that cannot
be eliminated. It is termed evil because maintaining inventory ties up money which could
have been used elsewhere and also because it increases the carrying cost. However, it is
considered a necessary investment to achieve workable system of production, distribution
and marketing of physical goods.
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