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EOQ FORMULA: IS IT VALID UNDER INFLATIONARY CONDITIONS?
Author(s) -
Jesse Richard R.,
Mitra Amitava,
Cox James F.
Publication year - 1983
Publication title -
decision sciences
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.238
H-Index - 108
eISSN - 1540-5915
pISSN - 0011-7315
DOI - 10.1111/j.1540-5915.1983.tb00192.x
Subject(s) - economic order quantity , economics , discounting , inflation (cosmology) , order (exchange) , stock (firearms) , perpetual inventory , econometrics , inventory management , microeconomics , inventory theory , operations management , business , finance , mechanical engineering , supply chain , physics , marketing , theoretical physics , engineering
The classical analysis of the economic order quantity (EOQ) problem ignores the effect of inflation. When a firm's cost factors are expected to rise at an annual rate of 10 percent or more, what adjustments in order quantities should the firm make to control its lot‐size inventory (or cycle stock)? Using a model that includes both inflationary trends and time discounting, it is concluded that inflation brings no incentive either to increase or to decrease order quantities. In addition, order quantities can be computed using the classical EOQ formula under inflationary conditions, provided that the cost of capital invested in inventory is interpreted as an inflation‐free cost. This interpretation implies that changes in the inflation rate should not affect the cost of capital that is utilized in the EOQ formula for determining order quantities.