Which of the following statements about the basic EOQ model is FALSE?
A) If the setup cost were to decrease, the EOQ would fall.
B) If annual demand were to double, the number of orders per year would increase by 73%.
C) If the holding cost were to increase, the EOQ would decrease.
D) If annual demand were to double, the EOQ would rise.
E) None. All of these statements are true.

Question

Quizplus · Accepted Answer

The EOQ (Economic Order Quantity) model is designed to minimize the total holding costs and ordering costs. The formula for EOQ is $\sqrt{\frac{2DS}{H}}$, where $D$ is the demand rate, $S$ is the setup or ordering cost, and $H$ is the holding or carrying cost per unit per time period. If annual demand were to double, the EOQ would indeed increase, as seen in option D, because the EOQ is directly proportional to the square root of demand ($D$). However, the number of orders per year would not increase by a specific percentage like 73% as stated in option B; instead, it would increase but at a rate determined by the new EOQ calculation. The increase in orders per year would actually be less than double, because as the EOQ increases, fewer orders are needed to meet the demand.

Which of the Following Statements About the Basic EOQ Model