Production set-up/ordering cost is fixed (independent of quantity produced).During a production run, the production of items is continuous and at a constant rate.Production runs to replenish inventory are made at regular intervals.Demand for items from inventory is continuous and at a constant rate.Note that the number of times an order is placed will also affect the total cost, however, this number can be determined from the other parameters The required parameters to the solution are the total demand for the year, the purchase cost for each item, the fixed cost to place the order and the storage cost for each item per year. We want to determine the optimal number of units of the product to order so that we minimize the total cost associated with the purchase, delivery and storage of the product There is also a holding or storage cost for each unit held in storage (sometimes expressed as a percentage of the purchase cost of the item). There is a fixed cost charged for each order placed, regardless of the number of units ordered. 1.3 Total cost function and derivation of EPQ formulaД®PQ only applies where the demand for a product is constant over the year and that each new order is delivered/produced incrementally when the inventory reaches zero.A multiproduct extension to these models is called product cycling problem.

Similar to the EOQ model, EPQ is a single product lot scheduling method. In some literature, 'economic manufacturing quantity' model (EMQ) is used for 'economic production quantity' model (EPQ). While the EOQ model assumes the order quantity arrives complete and immediately after ordering, meaning that the parts are produced by another company and are ready to be shipped when the order is placed.

The difference between these two methods is that the EPQ model assumes the company will produce its own quantity or the parts are going to be shipped to the company while they are being produced, therefore the orders are available or received in an incremental manner while the products are being produced. This method is an extension of the economic order quantity model (also known as the EOQ model). The economic production quantity model (also known as the EPQ model) determines the quantity a company or retailer should order to minimize the total inventory costs by balancing the inventory holding cost and average fixed ordering cost.

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