The classic inventory formula balancing two opposing costs — order too often and ordering costs pile up; order too rarely and holding costs pile up instead.
How it works
EOQ is the square root of twice the annual demand times the ordering cost, divided by the holding cost per unit — the order quantity where total ordering and holding costs are jointly minimized.
What this does not include
Classic EOQ assumes constant, known demand and no quantity discounts — real inventory management often needs to adjust for demand variability and supplier discount tiers, refinements this baseline formula doesn’t include.
How to use this calculator
- Enter annual demand, ordering cost per order, and annual holding cost per unit.
A worked example
Annual demand of 10,000 units, ordering cost $50, holding cost $2 per unit: EOQ = √(2×10,000×50/2) = 707.1068 units per order — the order size that minimizes total ordering and holding costs combined.
What the variables mean
| Variable | Meaning |
|---|---|
| Annual demand | Total units needed per year |
| Ordering cost | Fixed cost incurred each time an order is placed |
| Holding cost | Cost to store one unit for a year |
Edge cases worth knowing
EOQ balances two opposing costs. Ordering more often (smaller batches) raises total ordering costs but lowers storage costs, and vice versa — EOQ finds the exact quantity where the two costs are minimized together.
Zero holding cost makes EOQ undefined — with no storage penalty, there’d be no mathematical limit to batch size, so the calculator declines to show a result for that case.
Frequently asked questions
Why does EOQ use a square root?
Because ordering cost and holding cost move in opposite directions as order size changes — the square root formula finds the exact point where their combined total is lowest.
What counts as “holding cost”?
Storage, insurance, obsolescence risk, and the opportunity cost of capital tied up in inventory — typically expressed as an annual cost per unit held.
Does EOQ apply to service businesses?
No — it’s specifically for physical inventory management; a service business without physical goods to order and store has no direct EOQ application.
