Daniel has computed the EOQ for a product he sells to be 400 units.However, due to recent events he has a cash flow problem.Therefore, he orders only 100 units each time he places an order.Which of the following is true for this situation?
A)Annual ordering cost will be lower than annual holding cost.
B)Annual ordering cost will be higher than annual holding cost.
C)Annual ordering cost will equal annual holding cost.
D)Annual ordering cost will be unaffected by the order policy change.

Question

Quizplus · Accepted Answer

When Daniel orders only 100 units each time, he will need to place orders more frequently, increasing his ordering cost. On the other hand, his holding cost will decrease since he has lower inventory levels. However, the increase in ordering cost will exceed the decrease in holding cost, resulting in a higher annual ordering cost compared to the annual holding cost. Therefore, option B is correct.

Daniel Has Computed the EOQ for a Product He Sells