2.8.4 Determination of Economic Batch Quantity
The cost per unit decreases with the increase in the size of the batch on account of
economies of large scale production. If the industry increases the size of the batch
enormously, it might result in over stocking/unsold stock. The challenge therefore
is to produce in a lot with such a size to get the benefits of large scale production
and also be small enough to be sold. This optimum quantity is called Economic
Batch Quantity (EBQ). The EBQ is the optimization of several factors – the
economies of large scale production as well as the optimum quantity in the batch
that can be sold.
The following are the factors to be considered while determining Economic Batch
1) Setting up cost – This refers to the cost of setting machines for a batch of
production, giving instructions to the employees, assembly of the
machines, drawing of the materials from the stores etc.
2) Inventory carrying cost (Holding Cost) – This refers to the expenses
incurred in holding the materials. The actual costs are storage space,
security, wastage, insurance etc.
3) The rate of consumption of materials
4) Interest on the capital invested
5) Manufacturing cost
The economic batch quantity is actually an optimization of the above.
The following is the formula to calculate Economic Batch Quantity:
Q = √2 US
Q = Number of units in the economic batch
U = Annual units of production
S = Setting up cost per batch
C = Carrying cost per unit of production per annum