A decision model, based on differential calculus, that determines the optimum order size for purchasing (sometimes called the economic purchase quantity) or manufacturing (economic manufacturing quantity) an item of stock. The optimum order quantity is that which equates the total ordering and total carrying costs. The formula used is:
Q = √(2cd/h),
where Q is the quantity to be purchased or manufactured, c is the cost of processing an order for delivery, d is the demand in the period for that stock item, and h is the cost of holding a unit of stock. See also economic batch quantity.
Subjects: Business and Management — Economics.