Question

	If the order quantity doubles but the flow rate remains constant, what happens to the sum of ordering and holding costs? Decreases by 50% Decreases by less than 50% Remains unchanged Increases by less than 50% Increases by 50%

Answer 1

Here, flow rate means the demand requirements by the customers.

Being flow rate remains constant, what effect does double ordering quantity will have on the sum of ordering and holding costs (total inventory costs) is to be calculated.

Now, proceed as follows:

Assume the following figures to understand this effect.

Flow rate (demand requirements) = 20,000

Unit cost = $500

Ordering cost = $200

Holding cost = 10% of unit cost

Solve for EOQ (that will be the preferable quantity to order) as follows:

In this case, sum of holding and ordering costs is $20,000.

When EOQ doubles to 800 units, cost calculations will be as follows:

In this case, sum of holding and ordering costs is $25,000.

Now, this can be clearly visible that there is an increase in the sum of ordering and holding costs . Now, percentage increase in the sum of costs can be calculated as:

= (25,000 – 20,000) / 20,000 * 100

= (5,000 / 20,000) * 100

= 25%

Thus, the correct answer is " Increases by less than 50%"