In using EOQ formula; D and H must be in the same time unit. If D is annual demand, then H must also be in terms of annual holding cost per unit. For instance, in a problem if annual demand is 1,200 units but the problem states holding cost per unit per month is $1; you either change holding cost in terms of annual (i.e. H = $12 per unit per year) or change demand in terms of monthly demand (i.e. 1,200/12 = 100 units per month).

Sometimes holding cost is expressed as a percentage of product cost. For instance, if product cost is $30 and annual holding cost is 20% of product cost; then annual holding cost H = (0.20)($30) = $6.00. Here are two examples.

EOQ Example 1: Average weekly demand = 50 units Product cost = $30 Annual holding cost is 20% of product cost Order cost/order = $40 Number of weeks operations/year = 50

1. What is EOQ?
2. What is the total annual holding and ordering costs (TC)?

3. EOQ Example 2: Average weekly demand = 60 units Product cost = $40 Annual holding cost is 25% of product cost Order cost/order = $70 Number of weeks operations/year = 50

4. What is EOQ?
5. What is the total annual holding and ordering costs (TC)?