The economic order quantity (EOQ) model assumes which relationship between ordering and holding costs?

The economic order quantity (EOQ) model assumes which relationship between ordering and holding costs?

• A. Ordering costs decrease at a greater rate as size of order increases, and holding costs increase in direct relation to the size of the order.
• B. Ordering costs increase at a greater rate as size of order increases, and holding costs increase in direct relation to the size of the order.
• C. Ordering costs decrease at a greater rate as size of order decreases, and holding costs decrease in direct relation to the size of the order.
• D. Ordering costs decrease at a greater rate as size of order decreases, and holding costs increase in direct relation to the size of the order.

Answer: (A)

The idea being tested is how EOQ describes the way ordering and holding costs respond to changing the order size. In EOQ, ordering costs fall when you place larger, less frequent orders because you reduce the number of orders per year. The annual ordering cost is S times the number of orders, which is S*(D/Q); as Q increases, D/Q decreases, so ordering costs drop. Holding costs, on the other hand, rise with the amount of inventory you carry. The average inventory is Q/2, so the annual holding cost is H*(Q/2); as Q increases, holding costs increase. These opposing relationships create the balance EOQ seeks. The optimal order size occurs where the cost savings from ordering fewer orders equal the extra holding cost from carrying more inventory. That aligns with the described relationship: ordering costs decrease as order size grows, and holding costs increase with larger inventories. If ordering costs rose with larger orders or holding costs fell, there wouldn’t be the same balancing point.

The idea being tested is how EOQ describes the way ordering and holding costs respond to changing the order size. In EOQ, ordering costs fall when you place larger, less frequent orders because you reduce the number of orders per year. The annual ordering cost is S times the number of orders, which is S*(D/Q); as Q increases, D/Q decreases, so ordering costs drop. Holding costs, on the other hand, rise with the amount of inventory you carry. The average inventory is Q/2, so the annual holding cost is H*(Q/2); as Q increases, holding costs increase.

These opposing relationships create the balance EOQ seeks. The optimal order size occurs where the cost savings from ordering fewer orders equal the extra holding cost from carrying more inventory. That aligns with the described relationship: ordering costs decrease as order size grows, and holding costs increase with larger inventories. If ordering costs rose with larger orders or holding costs fell, there wouldn’t be the same balancing point.