Question

In the basic economic order quantity (EOQ) model, at Q* the estimated total annual holding cost:

a. is less than the estimated total annual ordering cost.
b. equals the estimated total annual ordering cost.
c. is greater then the estimated total annual ordering cost.
d. bears no necessary relationship to estimated total annual ordering cost.
e. None of the above

Answer 1

In the basic EOQ model, the estimated annual holding cost equals the estimated total annual ordering cost. The correct answer is B.

Step-by-step explanation:

In the basic EOQ model, the estimated annual holding cost is calculated as QH/2, where Q = EOQ and H = Holding cost per item per annum.

Estimated total annual ordering cost is calculated as DCo/Q, where D = Annual demand, Co = ordering cost and Q = EOQ.

The estimation of annual holding cost and annual ordering cost gives the same answer.

Answer 2

Answer: d

Explanation: there is no necessary fixed relationship between the holding cost and the ordering cost apart from the fact that they are inversely related. The EOQ is set out to reduce the costs of both. But mind you that there is an inverse relationship between the holding cost and the ordering cost

the cost of inventory under the EOQ model involves a tradeoff between inventory holding costs (the cost of storage, as well as the cost of tying up capital in inventory rather than investing it or using it for other purposes) and order costs (any fees associated with placing orders, such as delivery charges).