Calculate Purchase Cost

Purpose

This calculator tells you the annual cost of purchasing and carrying an item if you order a specific quantity each time you order, and shows how that compares to the cost-minimizing Economic Order Quantity (EOQ). It is useful when you already have a preferred or practical order size in mind (for example, a supplier's pack size or minimum order) and want to know its cost impact, or how far it is from the theoretically optimal order size.

Background

Ordering cost vs. holding cost

Every order you place costs money to process (Transaction Cost), regardless of its size. Every unit sitting in stock also costs money to hold over time (its Cost of Excess). Ordering a larger quantity each time means fewer orders per year (lower total transaction cost) but more average stock on hand (higher total holding cost); ordering a smaller quantity does the opposite. This calculator evaluates both costs for the Order Quantity you specify, and also reports the Economic Order Quantity — the order size that would minimize the combined cost — so you can see how your chosen quantity compares.

Two ways to state the holding cost

You can describe the annual cost of holding one unit in stock in either of two ways:

• Directly, as a cost per unit per year (Cost of Excess), or
• Indirectly, as a percentage of the unit's purchase price (Cost of Capital) applied to the Unit Cost.

If a Unit Cost is entered, the holding cost is derived as Unit Cost × Cost of Capital, and the calculator also reports Material Cost Total and Total Cost. If Unit Cost is left blank, Cost of Excess is used directly, and material and total cost cannot be computed since the purchase price is unknown.

Inputs

Demand

The quantity of the item expected to be used or sold per year.

Transaction Cost

The cost incurred each time an order is placed, regardless of the order size.

Unit Cost

The purchase cost of one unit of the item. Optional. When provided, it is used with Cost of Capital to derive the holding cost per unit, and enables the Material Cost Total and Total Cost results. Leave it blank if you prefer to state the holding cost directly with Cost of Excess.

Cost of Capital

The annual cost of tying up money in inventory, as a fraction of unit cost per year (for example, 0.2 for 20% per year). Used only when Unit Cost is provided.

Cost of Excess

The cost of holding one unit in stock for one year, stated directly in currency per unit per year. Used only when Unit Cost is left blank.

Order Quantity

The quantity you actually intend to order each time — this is the quantity being evaluated. It does not have to equal the Economic Order Quantity; the calculator reports the cost of ordering exactly this amount.

Results

Order Interval

The average time between orders, in months, that results from ordering the Order Quantity each time.

Number of Transactions

The number of orders placed per year at the Order Quantity.

Inventory Cost Total

The total annual cost of holding stock, based on the average inventory level (half the Order Quantity) and the per-unit annual holding cost.

Transaction Cost Total

The total annual cost of placing orders: Transaction Cost multiplied by Number of Transactions.

Operational Cost Total

Inventory Cost Total plus Transaction Cost Total — the total annual ordering-and-holding cost at the Order Quantity you specified.

Material Cost Total

The total annual cost of the goods purchased (annual Demand valued at Unit Cost). Appears only when Unit Cost is provided.

Total Cost

Material Cost Total plus Operational Cost Total — the full annual cost of acquiring and carrying the item at the Order Quantity you specified. Appears only when Unit Cost is provided.

Economic Order Quantity

The order size that would minimize Operational Cost Total, shown for comparison with the Order Quantity you entered. It does not change how the other results above are calculated — those are always based on your Order Quantity.

Understanding the Calculation

For the Order Quantity you specify:

• Number of Transactions = Demand ÷ Order Quantity
• Order Interval = 12 months ÷ Number of Transactions
• Inventory Cost Total = (Order Quantity ÷ 2) × Cost of Excess
• Transaction Cost Total = Transaction Cost × Number of Transactions
• Operational Cost Total = Inventory Cost Total + Transaction Cost Total

When Unit Cost is available, Material Cost Total = Demand × Unit Cost, and Total Cost = Material Cost Total + Operational Cost Total.

Separately, the calculator computes the Economic Order Quantity using the same formula as the dedicated EOQ calculator:

$$EOQ = \sqrt{\dfrac{2 \times \text{Transaction Cost} \times \text{Demand}}{\text{Cost of Excess}}}$$

This value is informational only — it is not substituted into the cost results above, which always reflect the Order Quantity you entered.

The currency used for all cost results is taken from the currency entered with Transaction Cost.

Example

Using the default inputs — Demand of 1200 unit/yr, Transaction Cost of 100 USD, Unit Cost of 5 USD/unit, Cost of Capital of 0.2 per year (20%), and an Order Quantity of 300 units — the derived Cost of Excess is 5 × 0.2 = 1 USD/unit/yr. The calculator returns:

• Order Interval: 3 months
• Number of Transactions: 4 per year
• Inventory Cost Total: 150 USD/yr
• Transaction Cost Total: 400 USD/yr
• Operational Cost Total: 550 USD/yr
• Material Cost Total: 6000 USD/yr
• Total Cost: 6550 USD/yr
• Economic Order Quantity: approximately 490 units (for comparison)

This shows that ordering 300 units every 3 months costs 550 USD/yr in combined ordering and holding cost — about 60 USD/yr more than the 490-unit Economic Order Quantity would cost, since 300 units is smaller than the cost-minimizing size and results in more frequent, though individually cheaper-to-hold, orders.

Important Assumptions and Interpretation

• The calculation assumes demand is steady over the year and that transaction cost and holding cost per unit do not change with order size (no quantity discounts).
• Order Quantity is taken exactly as entered; the calculator does not round it, adjust it toward the Economic Order Quantity, or check it against any minimum or maximum order size.
• If Unit Cost is left blank, Material Cost Total and Total Cost are not available, since the purchase price of the item is unknown; only the ordering-and-holding cost (Operational Cost Total) can be determined.
• To specifically evaluate a supplier's minimum order quantity (MOQ) against the EOQ - including the extra cost the MOQ imposes when it exceeds the EOQ - use the moq calculator, which builds on this same cost model.
• Results are a cost estimate based on the inputs provided, not a guarantee of actual costs, which will vary with real-world demand fluctuations and pricing changes.