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Answer Posted / subhashini
It is the optimum quantity of goods for which if orders are
placed, the aggregate order placing cost and the aggregate
inventory carrying cost.
The quantity per order (in units) that minimizes the total
costs of processing orders and holding inventory.
An inventory-related equation that determines the optimum
order quantity that a company should hold in its inventory
given a set cost of production, demand rate and other
variables. This is done to minimize variable inventory
costs. The full equation is as follows:
Where:
S = Setup costs
D = Demand rate
P = Production cost
I = Interest rate (considered an opportunity cost, so the
risk-free rate can be used)
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