The Economic Order Quantity (EOQ) is the optimal order size because it minimizes the annual total inventory cost.

The Economic Order Quantity (EOQ) is the optimal order size because it minimizes the annual total inventory cost.

• A. True
• B. False
• C. Not Enough Information
• D. It Maximizes Service Level

Answer: (A)

The idea behind EOQ is to minimize total annual inventory costs by balancing ordering costs and holding costs. When you order in larger quantities, you reduce the number of orders you place each year, which lowers the annual ordering cost. But you also tie up more capital in inventory, raising the annual holding cost. Conversely, smaller orders increase ordering costs while lowering holding costs. The optimal size is where these two components are balanced, so the total cost is minimized. The standard formula Q* = sqrt(2DS/H) captures this balance, with D as annual demand, S as the cost per order, and H as the holding cost per unit per year. In practice, this yields the order quantity that minimizes annual total inventory cost under the usual assumptions (constant demand, fixed lead time, no quantity discounts, no shortages).

The idea behind EOQ is to minimize total annual inventory costs by balancing ordering costs and holding costs. When you order in larger quantities, you reduce the number of orders you place each year, which lowers the annual ordering cost. But you also tie up more capital in inventory, raising the annual holding cost. Conversely, smaller orders increase ordering costs while lowering holding costs. The optimal size is where these two components are balanced, so the total cost is minimized. The standard formula Q* = sqrt(2DS/H) captures this balance, with D as annual demand, S as the cost per order, and H as the holding cost per unit per year. In practice, this yields the order quantity that minimizes annual total inventory cost under the usual assumptions (constant demand, fixed lead time, no quantity discounts, no shortages).