Question

Answer both questions below about the EOQ model. (a) In the EOQ model, unit product cost...

Answer both questions below about the EOQ model.

(a) In the EOQ model, unit product cost or selling price, C, is not included in the formula we use to solve for the economic order quantity. Explain why it is not necessary to include this information in the EOQ formula.

(b) What are the major limitations of the EOQ model?

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Answer #1

a) Economic Order Quantity is obtained by minimizing the total cost which includes holding cost, ordering cost and purchasing cost of the products.

TC = (Q/2)*H+(D/Q)*S+D*C => dTC/dQ = (H/2) - SD/Q2 = 0 => Q = SQRT(2*D*S/H)

By differentating TC with respect to quantity, the purchasing cost D*C which is a constant will become zero. Hencem it is not necessary to calculate the EOQ

b) The major limitations of EOQ model include -

1. Assuming that Annual Demand is constant.

2. Cost of ordering remains constant

3. Lead time is not deviating or fluctuating

4. Purchase price is constant for every product.

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