What is the purpose of calculating the economic order quantity (EOQ)?

The purpose of calculating the economic order quantity (EOQ) is to minimize total inventory costs. EOQ is a formula used to determine the optimal order quantity a company should purchase to minimize its inventory costs, which include holding costs, order costs, and stock-out costs. By finding this balance, businesses can ensure they are not overstocking, which incurs higher holding costs, or understocking, which may lead to stock-outs and lost sales.

Minimizing total inventory costs allows companies to operate more efficiently and maintain better cash flow. The EOQ model assumes that demand, holding costs, and ordering costs remain constant, making it a critical tool for inventory management. By focusing specifically on these costs, companies can make informed purchasing decisions that align with their operational and financial goals.