Economic Batch Quantity

Economic batch quantity (EBQ), also called "optimal batch quantity" or economic production quantity, is a measure used to determine the quantity of units that can be produced at minimum average costs in a given batch or production run.

Economic Production Quantity model (also known as the EPQ model) is an extension of the Economic Order Quantity model. The Economic Batch Quantity model, or production lot-size model, is similar to the EOQ model in that an optimum is to be calculated for the batch quantity to be produced.

In working with this EBQ model, principal assumptions are:

  • The demand (D) is known and constant within a certain period of time
  • The unit cost of the inventory item (U) is constant
  • The annual holding-cost per unit (Ch) is constant
  • The setup-cost per batch (C) is constant
  • The production time (tp) is known and constant
  • there is one kind of product
  • There is no interaction with other products
  • The aspect of time does not play a role, just the setup time does
  • The setup cost is constant and does not act upon the batch quantity.

Variables

  • K = setup cost
  • D = demand rate
  • F = holding cost
  • T = cycle length
  • P = production rate

Formula: squareroot(2x annual demandx setup costs)/(inventory carrying cost per unit)

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