Modified Economic Order Quantity under the Criterion of Internal Rate of Return

Abstract

This paper presents a new method, called a modified economic order quantity method, for determining the optimal inventory policy, which uses the rate of return as its decision criterion. Especially for the simplest possible inventory system with constant demand rate, no backlogging, no lead time, etc., the formula for the optimal order policy is derived. Also mentioned are the relative merits and shortcomings of this method compared to the conventional EOQ model.