Question

Sam Wood Ltd always use Economic order quantity model to determine its raw materials requirements. What will be the effect on the economic order quantity and the total annual holding cost of a decrease in the cost of ordering a batch of raw materials *
(a) The EOQ and the total annual holding cost will both be higher
(b) The EOQ will be lower and the total annual holding cost will be higher
(c) The EOQ and the total annual holding cost will both be lower
(d) The EOQ will be higher and the total annual holding cost will be lower

Answer 1

When there is a decrease in cost of ordering raw material, it will mean that the economic order quantity will also decrease but it will mean that the holding cost will be higher because there would be less orders and more holding periods available so the cost of holding will be significantly going up.

Rest of the statement stating otherwise they are not correct statement.

Correct answer would be option (B) economic order quantity cost will be lower and holding cost will be higher.