What is the Economic Order Quantity (EOQ) model and its basic formula?

What is the Economic Order Quantity (EOQ) model and its basic formula?

• A. EOQ minimizes ordering frequency; EOQ = sqrt(2DS / h)
• B. EOQ minimizes total inventory costs: EOQ = sqrt(2DS / h)
• C. EOQ minimizes holding cost only: EOQ = sqrt(DS / h)
• D. EOQ minimizes setup cost; EOQ = sqrt(2DS * h)

Answer: (B)

The main idea behind EOQ is to find the order size that minimizes overall inventory costs by balancing two fixed costs: ordering costs and holding costs. Ordering costs are incurred each time you place an order, so ordering more frequently increases these costs. Holding costs rise with the amount of inventory you keep on hand, so ordering in larger batches raises holding costs too. The EOQ model assumes steady demand, fixed ordering cost, fixed holding cost per unit per year, no stockouts, and derives the total annual cost as TC(Q) = (D/Q)S + (Q/2)h, where D is annual demand, S is the cost per order, and h is the holding cost per unit per year. Minimizing this total cost with respect to Q leads to Q* = sqrt(2DS/h). This concrete result shows how demand, ordering cost, and holding cost interact to determine the optimal order size. The correct choice states that EOQ minimizes total inventory costs and provides this standard formula, which aligns with the model’s purpose and derivation. The other options either misstate the objective or use an incorrect formula.

The main idea behind EOQ is to find the order size that minimizes overall inventory costs by balancing two fixed costs: ordering costs and holding costs. Ordering costs are incurred each time you place an order, so ordering more frequently increases these costs. Holding costs rise with the amount of inventory you keep on hand, so ordering in larger batches raises holding costs too. The EOQ model assumes steady demand, fixed ordering cost, fixed holding cost per unit per year, no stockouts, and derives the total annual cost as TC(Q) = (D/Q)S + (Q/2)h, where D is annual demand, S is the cost per order, and h is the holding cost per unit per year. Minimizing this total cost with respect to Q leads to Q* = sqrt(2DS/h). This concrete result shows how demand, ordering cost, and holding cost interact to determine the optimal order size.

The correct choice states that EOQ minimizes total inventory costs and provides this standard formula, which aligns with the model’s purpose and derivation. The other options either misstate the objective or use an incorrect formula.