The primary components of carrying cost are:
- Interest;
- Insurance;
- Taxes; and
- Storage costs.
For example if the following are used:
Annual usage – 1000 Order cost – 0.5 Cost per unit – 1 Cost of holding stock – 20% [converted to 0.2]
This is calculated as:
EOQ= √ (2 × (1000) × (0.5))/ (0.2 ×1) EOQ= √1000/0.2 EOQ= √5000 EOQ=70.71
Therefore the optimum order quantity the company should hold in its inventory is 71 units.