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Inflation And Economic Order Quantity(EOQ)

 Inflation & Economic Order Quantity (EOQ) Assignment / Homework Help
There is always an effect of inflation on economic order quantity. Inflation affects EOQ in two possible ways:
  • Change in the total annual purchase and
  • Increase in carrying costs

  • Change in the total annual purchase and

    EOQ model assumes that the annual demand is constant and is known with certainty. Inflation may change the quantity of units purchased or consumed. At times, the manufacturers may anticipate a rise in price of inventory in future and hence may wish to order in bulk and store it to avoid paying high price in future. Ultimately, the quantity purchased increases in such situations due to inflation.

    Of course, the benefit is the procurement of inventory at the prevailing lower prices.
  • Increase in carrying costs

    The cost of carrying inventory goes up as a result of increase in the interest rates due to inflation. Also, if carrying costs go up, the economic order quantity decreases according to the EOQ model, which increases the total ordering costs.

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