Considering that all the assumptions discussed in previous post to calculate EOQ are being satisfied, a cycle begins with Q units held in inventory, which happens when a new order is received. During the cycle, on-hand inventory is consumed at a constant rate because demand is known with certainty. As the lead time is a constant, a new lot can be ordered so that inventory falls to 0 precisely when the new order is received.
Formula for calculating EOQ (Q*) is as follows:
Formula for calculating EOQ (Q*) is as follows:
Where
D = annual demand (units per year)
S = cost of ordering or setting up one lot (in currency)
H = cost of handling one unit in inventory for a year
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