dear sir, it would be grateful if you could help on the number 20 of section A specimen paper June 2014. i have been taught that there is an inverse relationship between the ordering cost and the holding cost but the answer is D which is when there is a decline in the ordering cost there will be the same effect on the EOQ and holding cost.
Thank you
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Economic order quantity Specimen paper june 2014
7y ago#1If the order cost each time is lower, then the numerator in the EOQ formula is lower, and therefore the EOQ is lower.
At the EOQ, the total annual holding cost is always equal to the total annual order cost. The annual holding cost is the EOQ/2 x holding cost per unit, so if the EOQ is lower then the total annual holding cost is lower, and therefore the total annual order cost is lower as well.
The best way to convince yourself is to make up a numbers example and calculate the EOQ and the total annual order cost. Then take the same figures but reduce the order cost each time, and recalculate the EOQ and the total annual order cost. You will find that both of them are lower.
Thank you very much for your clear explanation sir.
7y ago#3You are welcome :-)
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