Our web-based Total Inventory Carrying Cost Calculator helps you easily streamline and simplify the process of calculating inventory carrying costs. See how our calculator can help optimize your inventory management strategies so you can forecast inventory needs more efficiently.
Inventory Carrying Cost Formula in EOQ
Inventory management must be dealt with efficiently for businesses of all sizes. One of the most effective ways to minimize inventory costs is by using the Economic Order Quantity (EOQ) model. EOQ helps determine the optimal order quantity that minimizes the combined costs of ordering and holding inventory.
Our Total Inventory Carrying Cost Calculator in EOQ provides a straightforward approach to calculating the carrying cost per unit, Economic Order Quantity, and total inventory carrying costs, making it easier to manage inventory effectively.
The formula for inventory carrying cost in EOQ is
Total Carrying Cost = (EOQ / 2) × Carrying Cost per Unit
Where,
EOQ = (2 × Annual Usage in Units × Ordering Cost per Order) / Carrying Cost per Unit
Carrying Cost per Unit = (Capital Cost + Storage Costs + Insurance Costs + Cost of Risk) / Average value of inventory
How the Calculator Works
The Total Inventory Carrying Cost is calculated in EOQ using the formula mentioned above.
- Carrying Cost per Unit: Calculated by adding Capital Costs, Storage Costs, Insurance Costs, and Cost of Risk, then dividing by the Average Inventory Value.
- Economic Order Quantity (EOQ): Calculates the ideal order size to minimize total inventory costs using the formula.
- Total Inventory Carrying Cost: Calculates the cost of holding inventory using the EOQ.
Example of Calculating Inventory Carrying Cost
Here’s an example to illustrate how to calculate the Total Inventory Carrying Cost using the EOQ model:
Suppose, a company wants to optimize its inventory costs for a particular product. They have the following information:
- Money Invested in Inventory (Capital Cost): $5,000
- Storage Costs: $2,000
- Insurance Costs: $1,500
- Cost of Risk: $500
- Average Inventory Value: $20,000
- Annual Usage in Units: 10,000 units
- Ordering Cost per Order: $100
Now we can calculate the total inventory carrying cost with the EOQ model using the formula we already mentioned.
Step 1: Calculate the Carrying Cost per Unit
Carrying cost per unit = (5,000 + 2,000 + 1,500 + 500) / 20,000 = $0.45
Step 2: Calculate the EOQ or Economic Order Quantity
EOQ = √(2 × 10,000 × 100) / 0.45 = 2,108.18 or 2109 units
Step 3: Now Calculate the Total Inventory Carrying Cost
Total Inventory Carrying Cost = (2,108.18 / 2) × 0.45 = $474.34
So, the carrying cost per unit is $0.45, the EOQ is 2,109 units, and the total inventory carrying cost is $474.34.
This example demonstrates that, based on the inputs, the company should ideally order 2,109 units per order cycle, and the total cost of holding this inventory would be $474.34 annually.
Conclusion
With this Total Inventory Carrying Cost Calculator in EOQ, managing inventory for your business should become streamlined, and efficient. It allows businesses to save time and costs while giving more focus to growth and business development. If you have any thoughts regarding this calculator please drop a comment below.