Question

You manage inventory as per the Economic Order Quantity (EOQ) model. However, you realize that you incorrectly specified the fixed cost of ordering. In specific, you underestimated the fixed cost of ordering by a factor of 2, i.e., fixed cost of ordering is actually twice of what you used in your model. Compared to the EOQ quantity obtained with the incorrect ordering cost, your true optimal EOQ quantity: __________

a. increases, but by a factor less than 2
b. decreases
c. remains unchanged
d. doubles
e. more than doubles

Answer 1

a. increases, but by a factor less than 2

Step-by-step explanation:

The formula to compute the economic order quantity is shown below"

`EOQ = (2* D * O)/(H)`

where

D Denotes Annual demand

O denotes Ordering cost

H denotes holding cost

In the case when the fixed ordering cost is doubled so the economic order quantity will rise but by a factor i.e. less than 2