Economic batch quantity
Economic batch quantity adapts the order-quantity model to inventory replenished gradually while demand continues. Where the production or delivery rate R exceeds demand rate D, maximum cycle inventory is Q(1 − D/R), so average cycle inventory is half that amount. With consistent annual rates, EBQ = √[2DCo ÷ (Ch(1 − D/R))]. The model requires stable assumptions and enough production capacity to replenish stock faster than it is used.
Worked example
D = 10,000, R = 20,000, set-up cost $50 and Ch = $2. EBQ = √[1,000,000 ÷ 1] = 1,000 units.
Common mistake
Use production and demand rates on the same time basis. The model is not valid with R no greater than D.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | MA | Direct | September 2026–June 2027 |
| FIA | FMA | Direct | September 2026–June 2027 |