A product whose EOQ is 40 experiences a decrease in ordering cost from $90 per order to $10. The revised EOQ is
A) three times as large
B) one-third as large
C) nine times as large
D) one-ninth as large
E) cannot be determined

Question

Quizplus · Accepted Answer

The formula to calculate EOQ is: 
EOQ = sqrt((2DS)/H)
where 
D = annual demand
S = ordering cost per order
H = holding cost per unit per year

If the ordering cost decreases from $90 to $10, the new EOQ will be:

EOQnew = sqrt((2DS)/H) = sqrt((2D(10))/H) = sqrt(20D/H)

Now, we don't know the value of D or H, but we do know that the only variable that has changed is S (ordering cost). Since S decreased by a factor of 9 (from $90 to $10), the new EOQ will increase by a factor of the square root of 9, which is 3. Therefore, the revised EOQ is one-third as large as the original EOQ (40), which is 13.33 or approximately 13.

A Product Whose EOQ Is 40 Experiences a Decrease in Ordering