Which statement about EOQ is true?

Which statement about EOQ is true?

• A. It minimizes total holding costs only
• B. It minimizes total ordering and holding costs
• C. It minimizes total ordering costs only
• D. It maximizes annual demand costs

Answer: (B)

EOQ is the quantity that minimizes the sum of the costs of placing orders and holding inventory. If you order very often, you incur high ordering costs even though you keep less stock. If you order infrequently, you reduce ordering costs but raise holding costs because you stock more on average. The EOQ rule balances these two opposing costs so the total of ordering and holding costs is as small as possible (the purchase cost is fixed for a given demand and price). The standard expression for the annual relevant costs is (D/Q)·S + (Q/2)·H, and EOQ is the quantity that minimizes this sum. Therefore, the statement that EOQ minimizes total ordering and holding costs is the best description.

EOQ is the quantity that minimizes the sum of the costs of placing orders and holding inventory. If you order very often, you incur high ordering costs even though you keep less stock. If you order infrequently, you reduce ordering costs but raise holding costs because you stock more on average. The EOQ rule balances these two opposing costs so the total of ordering and holding costs is as small as possible (the purchase cost is fixed for a given demand and price). The standard expression for the annual relevant costs is (D/Q)·S + (Q/2)·H, and EOQ is the quantity that minimizes this sum. Therefore, the statement that EOQ minimizes total ordering and holding costs is the best description.