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Please help to solve the below question :
1.A company always determines its order quantity for a raw material by using Economic Order Quantity (EOQ) model.
What would be the effects on the EOQ and the total annual holding cost of a decrease in the cost of a decrease in the cost of ordering a batch of raw material?
EOQ Annual holding cost
A. Higher Lower
B. Higher Higher
C. Lower Higher
D. Lower Lower2.A company always determines its order quantity for a raw material by using Economic Order Quantity (EOQ) model.
What would be the effects on the EOQ and the total annual ordering cost of an increase in the annual cost of holding one unit of the component in inventory?
EOQ Total annual ordering cost
A. Lower Higher
B. Higher Lower
C. Lower No effect
D. Higher No effectAnswer for Q1 – D, Q2 – B
I need to know why & how to answer it.Thanks.
1. If the cost of ordering is decreasing, then EOQ will be lower (just look at formula of EOQ).
If the EOQ will be lower, then each order quantity will be lower, so average inventory will be lower, and this leads that Annual holding cost will be lower.
Asnwer D.2. If holding cost is higher, then EOQ is lower (look at the formula).
Lower EOQ means we order more often. If we order more often, we have more ordering costs (annual ordering cost will be higher).
Answer A.@bishalrath said:
Why do we oder more when we have lower EOQ? Can you clear me that out please!!!If EOQ is lower then you are ordering less of quantity each time. Since quantity per order is lower that means you will have to order more times to meet the annual demand.
Hope that clears it.
@jetavi
Thank you so much
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