A company that orders at their economic order quantity has an annual ordering cost that is half of their total cost.

Question

Quizplus · Accepted Answer

According to the economic order quantity model, the total cost can be divided into two components: ordering cost and carrying (inventory holding) cost. The formula to calculate the total cost is TC = (Q/2) * S + (D/Q) * H, where Q is the order quantity, S is the ordering cost per order, D is the annual demand (in units), and H is the carrying cost per unit. If a company orders at their economic order quantity, then they minimize the total cost by balancing the ordering cost and carrying cost. In this case, the annual ordering cost would be equal to (Q/2) * S, which is half of the total cost. Therefore, the statement is true.

A Company That Orders at Their Economic Order Quantity Has