Final answer:
The EOQ model helps in finding the optimal order quantity that minimizes inventory costs, including ordering and holding costs, and is typically used with a continuous inventory system.
Step-by-step explanation:
The fundamental Economic Order Quantity (EOQ) model focuses on the trade-off between production costs and carrying costs. It is a tool used in inventory management to determine the optimal order quantity that minimizes the total cost of inventory, including ordering and holding costs. The EOQ model calculates the ideal purchase quantity to minimize the combination of these costs. When production costs decrease due to economies of scale, for instance, in large warehouse stores like Costco or Walmart, larger quantities can be produced at a lower average cost, reducing overall production costs.
As for the inventory system, the EOQ model is generally more aligned with the continuous inventory system rather than a periodic inventory system. In a continuous system, the inventory level is constantly monitored and a new order is placed when the inventory level reaches a certain reorder point. This contrasts with the periodic inventory system where orders are placed at fixed intervals and may not always correspond to reaching the minimum inventory level.