Question

The following is a TRUE statement about inventory within a continuous review system

	A.	When service level increases, Economic Order Quantity increases
	B.	When ordering or setup costs decrease, Economic Order Quantity increases
	C.	When ordering or setup costs increase, Economic Order Quantity increases
	D.	When holding costs increase, Economic Order Quantity increases
	E.	When demand decreases, Economic Order Quantity increases

Answer 1

Ans: C. When ordering or setup costs increase, Economic Order Quantity increases.

This statement can be proved through an example:

Suppose,

• Demand = 1000 units
• Ordering cost = $10
• Holding cost = $0.50

Therefore, EOQ = 200 units

Now increase ordering cost to $12.

Therefore, New EOQ = 219 units.

Ordering cost: Ordering cost is the cost which is incurred at the time of placing and receiving the order.

Incorrect options:

A. When service level increase, Economic order quantity increases:

Increase or decrease in service level has no effect on Economic order quantity. Increase in service level increases the safety stock.

B. When ordering or setup cost decrease, Economic order quantity increases:

There is an direct relationship between ordering cost and Economic order quantity. When ordering cost decrease, Economic order quantity also decreases

D. When holding cost increase, Economic order quantity increases:

There is an inverse relationship between holding cost and Economic order quantity. When holding cost increases economic order quantity decreases.

E. When demand decreases, Economic order quantity increases:

There is a direct relationship between demand and Economic order quantity. Decrease in demand result into to decrease in Economic order quantity.