Question

At the economic order quantity, what is the relationship between annual holding cost and annual order cost?

a. annual holding cost is less than annual order cost
b. annual holding cost equals annual order cost
c. annual holding cost is greater than annual order cost
d. there is no relationship
e. it depends on annual demand

Answer 1

At the Economic Order Quantity (EOQ), annual holding cost equals annual order cost. The EOQ is the inventory level that minimizes the total ordering and holding costs.

Step-by-step explanation:

At the Economic Order Quantity (EOQ), the relationship between annual holding cost and annual ordering cost is that they are equal. The EOQ is the quantity of inventory a company should order to minimize the total costs associated with ordering and holding inventory. This includes the costs of ordering more inventory and the costs of holding inventory in storage.

The EOQ formula is derived based on the assumption that there is a trade-off between ordering costs and holding costs. As a company orders less frequently in larger quantities, the ordering cost goes down but the holding cost goes up because more inventory must be stored. Conversely, ordering more frequently in smaller quantities will increase order costs but decrease holding costs. The EOQ is reached when these two costs are balanced out, hence at the EOQ point, annual holding cost equals annual order cost.