Explain EOQ and identify the assumptions behind the model.

Explain EOQ and identify the assumptions behind the model.

• A. EOQ minimizes total annual inventory cost but assumes variable demand and fluctuating holding cost.
• B. EOQ minimizes total annual inventory cost and assumes constant demand, fixed order cost, constant holding cost, no stockouts, and instantaneous replenishment.
• C. EOQ is used only for services.
• D. EOQ ignores ordering costs.

Answer: (B)

The main idea behind EOQ is to choose an order size that minimizes total annual inventory costs by balancing the cost of placing orders with the cost of holding stock. If you order in larger batches, you pay more in holding costs but incur fewer order costs; ordering in smaller batches reduces holding costs but raises ordering costs. The optimal quantity is where these two cost components are balanced. To work cleanly, EOQ relies on a set of simplifying assumptions: demand is constant and known over time; there is a fixed cost per order regardless of order size; holding cost per unit per year is constant; stockouts are not allowed (no backorders); replenishment is instantaneous or has zero lead time; and there are no quantity discounts (and usually you’re considering a single item). The choice that reflects these assumptions—constant demand, fixed order cost, constant holding cost, no stockouts, and instantaneous replenishment—best captures the model. The other statements misstate or omit important aspects: demand isn’t variable in the basic EOQ, there is a real cost to placing orders, EOQ is not limited to services, and ordering costs are a central part of what EOQ balances.

The main idea behind EOQ is to choose an order size that minimizes total annual inventory costs by balancing the cost of placing orders with the cost of holding stock. If you order in larger batches, you pay more in holding costs but incur fewer order costs; ordering in smaller batches reduces holding costs but raises ordering costs. The optimal quantity is where these two cost components are balanced.

To work cleanly, EOQ relies on a set of simplifying assumptions: demand is constant and known over time; there is a fixed cost per order regardless of order size; holding cost per unit per year is constant; stockouts are not allowed (no backorders); replenishment is instantaneous or has zero lead time; and there are no quantity discounts (and usually you’re considering a single item). The choice that reflects these assumptions—constant demand, fixed order cost, constant holding cost, no stockouts, and instantaneous replenishment—best captures the model. The other statements misstate or omit important aspects: demand isn’t variable in the basic EOQ, there is a real cost to placing orders, EOQ is not limited to services, and ordering costs are a central part of what EOQ balances.