Question

  Economic Order Quantity models …………………

		are the simplest of all lot sizing methods
		provide coverage for some predetermined number of periods
		do not require for the annual demand to be known
		can handle variable lead-times
		can lead to minimum costs if usage is fairly uniform

Answer 1

Economic order quantity is the order quantity which minimizes total annual inventory cost if usage is fairly uniform. Annual inventory cost is sum of annual ordering cost plus annual inventory holding cost .

Economic order quantity ( EOQ ) is calculated as :

EOQ = Square root ( 2 x Ordering cost x Annual demand/ Annual inventory holding cost )

It is thus to be noted that annual demand needs to be known for determination of economic order quantity . Economic order quantity is independent of Lead time. It is reorder point ( and not EOQ ) which gets affected by varying lead time .

There is no benchmark which has established that EOQ is the simplest of all lot sizing methods

On basis of all above , we can conclude that the correct answer would be “ can lead to minimum costs if usage is fairly uniform”

ANSWER : CAN LEAD TO MINIMUM COST IF USAGE IS FAIRLY UNIFORM