What is the EOQ formula?

EOQ = √(2DS / H), where D is annual demand in units, S is the fixed cost to place one order, and H is the cost to hold one unit for a year. For D = 12,000, S = $50, and H = $3, EOQ = √(2 × 12,000 × 50 / 3) = about 632 units.

What is the holding cost H in EOQ?

H is the annual cost to hold one unit in stock — the sum of capital, storage, service, and risk costs. It's usually calculated as the carrying-cost rate times the unit cost. For a $12 item at a 25% carrying rate, H is $3 per unit per year.

Why are ordering cost and holding cost equal at the EOQ?

The EOQ is the bottom of the total-cost curve, where the two costs trade off exactly. Order more and holding cost rises while ordering cost falls; order less and the reverse. The minimum total cost sits at the point where they're equal — in the example, about $949 each, for $1,897 total.

Does the order quantity have to be exactly the EOQ?

No. The total-cost curve is flat near the bottom, so being modestly off costs very little. In the example, ordering 20% more than the EOQ raises total cost only about 1.6%, so it's fine to round to a case or pallet pack. Large deviations do matter — doubling or halving the order size raises total cost about 25%.

Economic Order Quantity (EOQ)

EOQ is the order size that makes ordering and holding cost cheapest together: EOQ = √(2DS / H), with D annual demand, S the cost to place an order, and H the cost to hold a unit for a year. Here’s the formula worked out, why the two costs are equal at the EOQ, and why you can safely round the answer to a pack size.

The formula, and what goes into it

EOQ = √(2DS / H). There are only three inputs: D, the annual demand in units; S, the fixed cost to place and receive one order (paperwork, setup, inbound handling); and H, the cost to hold one unit in stock for a year. Ordering big and rarely cuts S but raises H; ordering small and often does the reverse. EOQ finds the size where the two balance.

A worked example

Demand is 12,000 units a year, an order costs $50 to place, and holding one unit for a year costs $3. EOQ = √(2 × 12,000 × 50 / 3) = about 632 units. That’s 19 orders a year, roughly every 19 days. Annual ordering cost works out to about $949, annual holding cost about $949, for a total of $1,897.

At the EOQ, the money you spend placing orders and the money you spend holding stock are equal. That balance point is the EOQ.

Where H comes from

The holding cost is the input people get wrong most often. It’s not just warehouse rent — it’s capital (the cost of money tied up in stock), storage, service (insurance, taxes), and risk (shrink, obsolescence, damage), added up as a rate and applied to the unit cost. A $12 item at a 25% carrying rate has H = $3. The Carrying Cost Calculator builds that number for you.

The curve is forgiving — round to a pack

You rarely can order exactly 632 of anything. Good news: the total-cost curve is flat near the bottom, so being a bit off barely costs anything.

Order size	vs. EOQ	Extra cost
632 units	the EOQ	—
758 units	+20%	+1.6%
316 units	half	+25%
1,264 units	double	+25%

So round the EOQ to whatever pack, pallet, or minimum-order quantity is convenient — a 20% adjustment costs under 2%. Just don’t drift to half or double, where the penalty climbs to about a quarter more.

Where EOQ stops applying

EOQ assumes steady demand, a fixed order cost, and no quantity discounts. When a supplier offers price breaks at higher volumes, or demand is lumpy, or storage is hard-capped, the plain EOQ needs adjusting. Treat it as the strong default order size, then layer real-world constraints on top. It sets how much to order; the reorder point sets when, and the inventory planning guide ties the two together.