A firm consumes 90000 units of a certain item of raw material in its production process annually. It costs Rs. 3 per unit, the cost per purchase order is Rs. 300 and the inventory carrying cost is 20% per year. What is the EOQ?

Economic order quantity (EOQ), refers to the optimum amount of an item that should be ordered at any given point in time, such that the total annual cost of carrying and ordering that item is minimized. EOQ is also sometimes known as the optimum lot size. 

EOQ = \(\sqrt{\dfrac{2DS}{H}}\)

Where,

D = Annual demand in units = 90000

S = Ordering cost per purchase order i.e., cost of placing and receiving 1 order = Rs. 300

H = Holding cost or Carrying Cost = [Inventory carrying cost(%)] * [Cost of material per unit] = 20% * Rs. 3 = Rs. 0.6

Now, substituting the given values in the EOQ formula, we get

EOQ = \(\sqrt{\dfrac{2* 90000 * 300}{0.6}}\)

⇒ EOQ = √[90000000]

⇒ EOQ = 9486.83 units ≈ 9487 units

Thus, the EOQ is 9487 units.