An extension of the EOQ production model based on damage costs

The conventional Economic Order Quantity (EOQ) lot-size model ignores the effects of damage costs. While producing an EOQ lot, the inventory may go ‘out of control’. An extension of the EOQ production model based on damage costs is presented and the relevant costs of damage and their effects on stockholding costs are discussed. A new EOQ formula including damage costs is developed and a comparison between the conventional concept and the new concept based on annual total cost is made. The analysis shows that, if the costs of damage to stock are taken into account, the computed EOQ is smaller, and the conventional EOQ is not the optimum solution.