Question

According to the assumptions upon which the EOQ model is based, total inventory costs _______________ with increases in the number of units ordered in each order. Select one: a. increases, but at a slowing rate b. first increases, then decreases c. first decreases, then increases d. decreases, but at a slowing rate

Answer 1

c. first decreases, then increases

Step-by-step explanation:

When you are calculating the EOQ, you consider ordering costs and carrying costs. If the order quantity increases, the carrying costs will also increase. But the ordering costs will decrease since less orders will be made. That means, that carrying costs and ordering costs vary inversely proportionate to the ordering quantity, i.e. they move in opposite directions.

When we place a higher quantity order, our ordering costs will first decrease, but then as carrying costs increase, total inventory costs will start to increase.

The attached image shows this relationship: