Enter the annual demand, the cost per order ($), and the carrying cost per unit ($) into the Ordering Cost Calculator. The calculator will evaluate and display the Ordering Cost. 

Ordering Cost Formula

The following formula is used to calculate the Ordering Cost. 

OC = SQRT ( (2* AD*CPO)/CC)
  • Where OC is the Ordering Cost ($)
  • AD is the annual demand 
  • CPO is the cost per order ($) 
  • CC is the carrying cost per unit ($) 

To calculate the ordering cost, multiply 2 times the annual demand and cost per order, divide this result by the carrying cost per unit, then take the square root of the result.

How to Calculate Ordering Cost?

The following example problems outline how to calculate Ordering Cost.

Example Problem #1

  1. First, determine the annual demand. The annual demand is given as 500 .
  2. Next, determine the cost per order ($). The cost per order ($) is calculated as  20 .
  3. Next, determine the carrying cost per unit ($). The carrying cost per unit ($) is found to be 4.
  4. Finally, calculate the Ordering Cost using the formula above: 

OC = SQRT ( (2* AD*CPO)/CC)

Inserting the values from above yields: 

OC = SQRT ( (2* 500*20)/4) = 70.71 ($)

FAQ

What factors can affect the carrying cost per unit?

Carrying cost per unit can be affected by several factors including storage costs, insurance, depreciation, spoilage, and opportunity costs of the capital tied up in inventory. These costs vary significantly depending on the type of goods stored, the storage methods, and the length of time the items are stored.

How can businesses reduce their ordering costs?

Businesses can reduce their ordering costs by optimizing their order quantities, negotiating better terms with suppliers, consolidating orders to achieve economies of scale, implementing efficient inventory management systems, and reducing the number of emergency orders through better forecasting and planning.

Why is it important to calculate the ordering cost accurately?

Accurately calculating the ordering cost is crucial for businesses to determine the most cost-effective order quantities (Economic Order Quantity – EOQ), maintain optimal inventory levels, minimize storage and handling costs, and ultimately improve profitability. It helps in making informed purchasing decisions and in strategic financial planning.