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    Question

    If Economic order quantity (EOQ) is increased, what

    happens to total carrying cost and total ordering costs?
    A Both Increases Correct Answer Incorrect Answer
    B Both Decreases Correct Answer Incorrect Answer
    C Both Remains constant Correct Answer Incorrect Answer
    D Total Carrying cost decreases while the ordering costs increases Correct Answer Incorrect Answer
    E Total Carrying cost increases while the ordering costs decreases Correct Answer Incorrect Answer

    Solution

    If the Economic Order Quantity (EOQ) is increased (meaning larger order sizes are placed), the total carrying (holding) costs increase, while the total ordering costs decrease.    Total Carrying Cost – Increases Carrying Cost = EOQ/ 2 × Carrying Cost per unit Since the company is ordering in larger quantities, the average inventory held increases, resulting in higher storage, insurance, and obsolescence costs. T hus carrying cost rises.   Total Ordering Cost – Decreases Ordering Cost = Annual Demand/ EOQ × Ordering Cost per order With a higher EOQ, fewer orders are needed throughout the year, reducing administrative and setup costs. As such ordering cost falls.   The EOQ model acts as a balance between these two, minimizing their sum.

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