In the EOQ model, the total cost to minimize consists of which two components?

In the EOQ model, the total cost to minimize consists of which two components?

• A. Ordering cost and holding cost
• B. Safety stock and service level
• C. Purchasing price and transport costs
• D. Labor costs and overhead

Answer: (A)

In the EOQ framework, the quantity you order is chosen to balance two costs that change with how much you order. The first is the cost of placing orders: you incur an ordering cost each time you place an order, so total annual ordering cost scales with the number of orders, which is D divided by the order quantity Q. The second is the cost of holding inventory: keeping stock has a carrying cost per unit per year, so total annual holding cost scales with the average inventory, which is Q/2 for a constant demand model. Together, these two components form the total cost you minimize with respect to Q (often written as C(Q) = (D/Q)S + (Q/2)H, ignoring the fixed purchasing cost if the unit price is constant). The purchasing price and transport costs are fixed with respect to Q in this basic setup, so they don’t drive the optimal order quantity. The other costs listed aren’t part of the standard EOQ optimization.