RAJ Company and LEE Company each annually order the exact same amount of an item from the same supplier (They each have the exact same annual demand from their customers for this item and the lead time from the supplier is the same for both companies). There is no variation at all for either company in either daily demand or lead time from the supplier.They pay the exact same price to the supplier for the item. They both figure that their ordering cost is $50 per order.However, RAJ has determined its annual inventory carrying cost is 20%, whereas LEE figures it is only 10%. Which of the following would be true?
A)RAJs EOQ is higher than Lee's EOQ
B)LEE's EOQ is higher than RAJ's EOQ
C)both have the same EOQ

Question

Quizplus · Accepted Answer

The EOQ formula takes into account ordering cost and carrying cost. Since both companies have the same demand and lead time, the only difference is the inventory carrying cost. LEE's lower inventory carrying cost means that they will want to order more frequently and in smaller batches to reduce their inventory holding costs. Therefore, LEE's EOQ will be lower than RAJ's EOQ, and the answer is B.

RAJ Company and LEE Company Each Annually Order the Exact