Economic Production Quantity (EPQ)

Published by MBA Skool Team, Last Updated: January 22, 2018

What is Economic Production Quantity (EPQ)?

Economic production quantity (EPQ) is the quantity of a product that should be manufactured in a single batch so as to minimize the total cost that includes setup costs for the machines and inventory holding costs.

The basic model of EOQ gives the equation to calculate EOQ as follows,

                       

EOQ= √((2* D*Co*P)/(Ci*(P-D)))

where,

D = Annual demand for the product

P = Annual rate of production

Co= fixed cost per setup or the setup cost

Ci= Inventory holding cost per unit

 

This is deduced by differentiating and finding the minima for the equation for the total annual cost, which comprises of the setup cost and the inventory holding cost.

With increasing batch production quantity, the number of batches to be produced in the year decreases and thus the setup cost decreases but at the same time the inventory holding cost goes on increasing. At the EPQ value, the total cost comprising of both these costs is at its minimum value.

 

This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.

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