Question

When using the simple EOQ model to determine optimal order quantity, which of the following is true?
A. Order quantity increases as order cost per order decreases
B. Order quantity decreases as order cost per order increases
C. Order quantity increases as holding cost per unit per year decreases
D. Order quantity decreases as holding cost per unit per year decreases

Answer 1

Answer:

C. Order quantity increases as holding cost per unit per year decreases

Explanation:

the formula for calculating economic order quantity (EOQ) is:

EOQ = √(2SD/H)

• S = cost per order
• D = annual demand
• H = holding cost per unit

If holding cost per unit (H) decreases, the EOQ will increase. Whenever you are dividing, if the denominator decreases, the result will be larger.