# ðŸ”´ EOQ Calculation in 13 min. – How to Calculate Economic Order Quantity Model or EOQ Model

EOQ Calculation in 13 min. – How to Calculate

Economic Order Quantity Model or EOQ Model Hello and welcome back again to MBAbullshit.com.

So our topic for this video is the Economic Order Quantity Model or EOQ. Remember you

can always go back to MBAbullshit.com. Alright, now this video talk about the basic EOQ model,

Economic Order Quantity Model and after this you can move on to my next video on MBAbullshit.com

on “EOQ with Quantity Discounts”. Also check out my other related free video on “Re-Order

Point” or the basic ROP Model. And after that, you can move on to my next video on

MBAbullshit.com about Re-order Point with Safety Stock.

Now, let’s start with a story to make it easy to understand. Let’s say that your

friend Bob wants to buy basketballs from a factory and sell them to his neighborhood.

Bob can buy the basketballs at $ 10 each from the factory, and he plans to sell it in his

neighborhood shop for $ 20 each. He estimates he’ll sell around 1200 basketballs a year.

At first, Bob thought of just buying around 100 basketballs per month from the factory,

which will equal his 1200 basketballs by the end of the year. However, Bob is kind of irritated

at the factory because aside from the $ 10 cost of the basketball, the factory charges

him a silly crazy $90 “Ordering Fee” every time he makes an order. Maybe you’d experienced

this when you buy stuff from say discount Airlines or whatever they’d like to add

on these crazy silly fees to earn extra money. Anyway, so every time he makes an order, they

charge him $ 90 ordering fee. Now, in MBAbullshit language, we call this Ordering Cost or Set-up

Cost. Because sometimes it’s not a fee for ordering, it’s a fee to set-up something

because every time they service you, maybe they have to set-up something new just to

service you to give you the service so they charge you a Set-up Cost. So if he or Bob

orders every month, then he’ll have an added ordering fee cost of $ 90 a month or $ 1,080

a year! So Bob comes up with a clever plan. “I’ll just order all 1200 basketballs

only once for the whole year, so I’ll just pay the $ 90 ordering fee one time”. That’s

what Bob says. So he decides to pay $ 90 a year ordering fee instead of $ 1,080.

But just when Bob thought he had the problem solved, he sees another problem! He doesn’t

have a space in his shop to keep many basketballs. He needs to rent extra space from his greedy

rich neighbor who has a big garage. For any extra space just enough to store 1 basketball,

his neighbor charges $ 3 per year. We’ll call this “Holding Cost per unit per year”.

Per unit in this case, we mean for each basketball because 1 basketball is 1 unit. So in other

words, it’s expensive for Bob if he orders few basketballs at a time because of the ordering

fee or set-up cost which is $ 90 per order. And it’s also expensive for Bob if he orders

only a lot of basketballs at one time; because of the storage rental fee or “Holding Cost”

which will cost him $ 3 per basketball per year ($ 3 per unit per year). So what should

Bob do now? Should he order a lot at one time or should he order a little every month? What

is the best number of basketballs that Bob should order at one time? So that number that

we’re looking for now is called the “Economic Order Quantity” or EOQ.

To find out the best or optimal number of basketballs or EOQ that Bob should order at

one time, we use this super simple formula: the EOQ equals the square root so that this

funny looking thing over here is called square root and you can find it in your scientific

calculator. The square root of 2 multiplied by 1,200 multiplied by $ 90 divided by 3:

EOQ=? [2(1,200)($90)]/$3 . Now, where did we get these numbers over here?

First of all, this square root over here is given as part of the formula and this number

2 over here is also given as part of the formula. We did not get it from the story about Bob.

Where did we get the 1,200, the 90 and the 3? It comes from the basic formula over here:

EOQ=? [2xDxS]/H. 1,200 is the demand for year so if you remember earlier in the story

it was given in the story that Bob expects to sell about 1,200 per year so that’s where

we get it. Where did we get this $ 90? That is the Set-up Cost or letter S. Remember every

time Bob orders from the factory, that greedy factory charges him a silly crazy fee of $ 90

per order or $ 90 ordering fee or $ 90 in Set-up Cost which is over here. Where did

we get this $ 3? That is the holding cost per unit that’s why we have letter H here.

Remember his greedy neighbor charges Bob $ 3 for every basketball per year that Bob stores

it. So that is the holding fee per year for one unit of basketball. So that’s here.

Alright, so if we simplify that further, 2 multiplied by 1,200 multiplied by 90. By the

way, these letter Xs over here, you see these letter Xs? Those are multiplication signs.

Those are not variable. So 2 multiplied by 1,200 multiplied by 90 equals to 216,000 divided

by 3: EOQ=? $216,000/$3. We simplified that further looks like this 216,000 divided by

$3 equals 72,000: EOQ=? 72,000. And then we get the square root of that, so how do

you do that on your calculator? Well that depends on your calculator but on my calculator

which is a Casio, you first press the square root number and then you write the 72,000.

So on my calculator you first press the square root and then you input the number. Make sure

that you do this square root thing in the last part. Do not type the square root first

and then do all these crazy computations. You only use this square root function on

your calculator after you have only one figure left inside it and you push the square root

button and then input the number. So the square root of 72,000 is 268.33.

So what do we learn from this? We learned that Bob should order 269 basketballs at a

time at each time. So if Bob orders 269 basketballs at a time, he will have the lowest cost overall

instead for example if he buys 250 basketballs at a time his cost will go up. Why? Because

it’s less than 269. If Bob orders more than 269 basketballs at a time, if he buys 280

basketballs at a time, his cost will also go up. The optimum best number is 269. You

might wonder why is this 269. We have the result of 268.33 because we always round it

up to a nearer whole number but actually in this case it’s up to you if you want to

round it off to 268 or 269. But you do not leave a decimal place in your actual number.

Why don’t you leave a decimal place? Because you cannot buy 0.33 of a basketball. Bob cannot

tell the factory “Hey, give me 268 basketballs and also give me 0.33 of 1 basketball. You

cannot do that. So Bob should order 268 or 269 basketballs at a time at each time. Now,

here’s a tip; at this number, 269 or 268. By the way, do you round it off to the higher

number 269 or 268? My professor likes to round it off to the higher number 269 but your professor

might prefer 268, so check out that with him which one he prefers. Now here’s the tip;

at this number of 269 basketballs, your set-up or ordering fee per year will equal your holding

and rental cost per year. So the total cost is more expensive when the set-up cost and

the holding cost is uneven when they are not the same. So what we’re actually doing with

this formula is we’re finding the number over here with which your set-up cost per

year or ordering fee per year will equal your holding and rental cost per year.

Alright so that’s how simple it is. You’re now ready for my next video on MBAbullshit.com

about EOQ or Economic Order Quantity with Quantity Discounts. And you can also check

out my other free video on “Re-Order Point” or the basic Re-Order Point Model. And after

that, you can move on to my next video on MBAbullshit.com about “Re-Order Point with

Safety Stock”. So there it is. Please if you like this video,

please share it. On Twitter, we are @MBAbullshit. Look for us on Facebook, Facebook.com/MBAbullshit

or forward my YouTube link on your email or simply post my videos on your Facebook. That

would be cool. Remember, you can always go back to MBAbullshit.com for more free videos. debbierojonan Page 1

Fantastic man . Thanx

welcome man

thanx alot man… nice work

welcome man…

going for an interview tomo… its for an inventory management position… lets see if this helps me get a job ðŸ˜‰

wow good luck

i got the job mann!!!!!!!!!!!!!!!!!!!!!!!!!

holy f***!!! Congratulations mann!!!! So happy for you!!

thanks man! i have a test on this tmrw and finally understand how to find the EOQ

Great video i missed classes of this calculation (EOQ), but i make it up from you thank a lot.

Glad you made it up now!

The best of luck in your exam in Malaysia, dude!

I enjoyed watching it I had no idea how to work it before

Great you have an idea now!

You're better than my professor. Now, i actually understand it.Thank you!

Glad to know you understand it and good luck, Green January!

Thanks for sharing such a nice PPT of EOQ

Welcome, Anuj!

Thanks, WingsOfJustice, I look forward to the karma then. ðŸ˜‰

very nice !! thanks alot !

this is just the best video on oprn mngt av seen…how easy is this alwys nagging unit

@joe wow thanks! That you've "av seen" ðŸ™‚

thank you.

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You make the work seem so simple, My tutor usually leaves me lost and confuse with his powerpoint slides, i really dont understand why tutors think it is:"soo effective" to teach from a powerpoint slide.

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where is the EOQ model with quantity discount video?

@Sudhan it's on my website, cheers!

This video was exceptionally helpful. Thank you so much for making it!

@feioncastor An exceptional thank you to you too

Thanks bro! You are better than my professor!

@Simpleng welcome bro!

Absolutely simple to understand

@Ravi absolutely thank you

excellent it is very simple and easy to understand

excellent it is very simple and easy to understand. Thankyou so much for your video.

@Bharathi glad you find it excellent

Can you please explain the derivation of the formula. It is easy to remember the formula on understanding the formula.

Great work with this video by the way. ðŸ™‚

@ok :p

Simple and well understood.

@Kabete happy you find it simple

Great video many thanks!! Just no need for calculator lessons though ðŸ™‚

@WCeph many welcomes ðŸ™‚

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I am impressed

@HenryOkonkwo Happy to impress you ðŸ™‚

do you have the one with the quantity discount?

Awesome stuff. Keep up the good work.

Hi, I can not find the video of ROP with safety stock. Can anyone help me please?

Thanks! helped a lot

Thanks MBAbullshitDotcom, these video's are very helpful.

Very helpful for my homework!!!! Love the name of your website…lol…I truly agree…lol

Hey where can I find your "EOQ with Quantity Discount" video ? I don't see it on your list of posted videos.Â

Nice ðŸ™‚

such a good way to learn Thank you so much! ðŸ˜€ its Great

wow… u made it so easy and simple..thanks!

Very helpful. I already understood the subject material. I just came online to get a refresher because I just learned it yesterday. Well, I really understand it today in a way that I'll remember. Thanks!

Hey, thanks so much for the video. I love it. I have a question. You mean "a time" means that he orders 269 items each month?Â

got an important exam tomorow! I got it now. many thanx

You are a life saver once again.

very helpful…thanks a lot ðŸ™‚

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EOQ

and when i dont understand I always come to BUllshit . thanks mate…

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Well elaborated and expanded. Thanks mate

ey bullshitÂ MAA NIGGA!

SEHLOIRO

Esse Ã© o famoso circo do soleeed EOQ

Well Played !

ROP with safety stock video is not working!

Kindly upload or send any link for the same : ROP With Safety Stock

EOQ is soooooooooooo easy now after watching this

Thanks for the video and actually it's really helpful, I have a question.

If the EOQ is 269, then I would have to make 5 ordes which would cost me $450 for the Set up and I would have to pay $807 for the Holding.

Isn't cheaper to purchase 240 basketballs through 5 orders and $720 for the holding with a saving of $87?

LOL 10:17

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Excellent for those who even deceive to study a new subject without getting admission in school at 60

hey thanks for the video! do you know what setting you need your calculator to be in order to get the correct calculations? my casio's giving me strange figures that don't match yours.

better than my accounting professor

I love you!!!!! you should be my professor!!

you are good bro …thumbs up for your video…

Hahaha EOQ for dummies like me to understand it VERY VERY well. Thanks a lot for the video man! Cheers from Brazil.

Ok if S is unknown .. how do we know it?

better than my big fat shitty professor. very entertaining yet educational

Hello guys please help me I have this .

Annual demand is 10 000 units . production averages 100 units per day ,while demand is 40units per day holding costs are $2.00 per unit per year and setup is $200.00

Now I need to determine a size batch to be used n heres my calculations but am not sure

EOQ=âˆš(10000)(200)/2 came to a qureroot of 45

Great video, thank you! Really helped me understand the process.

Thanks for sharing!

thanks a lot this really helped

TqðŸ’•it's very helpful…

I'm not getting it ? I'm using a scientific calculator and I've put in the digits and I'm getting 152,735.06 not 216,000