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In: Operations Management

Using the EOQ​ model, if a​ firm's order quantity is 500 units and its annual holding...

Using the EOQ​ model, if a​ firm's order quantity is 500 units and its annual holding cost is greater than its annual setup​ cost, then what can we say about the optimal order​ quantity?

A. Optimal order quantity​ = 500 units

B. Optimal order quantity​ < 500 units

C. Optimal order quantity​ > 500 units

D. Not enough information is given to answer the question

Solutions

Expert Solution

Answer: B. Optimal order quantity​ < 500 units

Since Holding cost > Set-up cost, the order quantity needs to be reduced such that average inventory decreases and thus Holding cost decrease. Order cost will increase since no. of order increases. Thus order quantity has to be reduced to optimal order quantity.

Thus optimal order quantity < 500

keosha answered 2 years ago
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