Question

(1) 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?

Answer 1

1) Economic order quantity is the quantity which is most economical to order, in other word economic order quantity is the size of the order which gives the maximum economy in purchasing any material and ultimately contributed towards maintaining the material at the optimum level at the minimum cost, it equates the cost of ordering with the cost of storage material.

                                        Cost per unit is not included in the EOQ it is understood that S which is storage and carrying cost % of the cost included the cost per unit, by again using C the double effect will reduce the EOQ.

2) The major limitations of EOQ model are as follows -

EOQ is ultimately a design which is suitable for a stable demand situation.

• Most of the components of a product are not manufactured in the same lot thus to calculate the overall storage time and other variables separately is difficult as to avoid this components should be manufactured in the same lot sizes as the assembly.
• There is no specific allowance in the simple EOQ formula for the fact that the space cost for different items can be very different indeed. There is no specific allowance in the simple EOQ formula for the fact that the space cost for different items can be very different indeed.