Which of the following is correct for a firm that places orders for an item in amounts greater than the economic order quantity?

Question

Quizplus · Accepted Answer

The economic order quantity is the optimal size of an order, taking into account the tradeoff between ordering costs and holding (carrying) costs. If a firm places orders for an item in amounts greater than the economic order quantity, the marginal reduction in order cost becomes smaller while the marginal carrying cost per item increases. This means that the cost of holding excess inventory increases more than the cost savings from ordering larger quantities, resulting in a situation where the marginal carrying cost per item exceeds the marginal reduction in order cost. Therefore, it is not optimal to place orders for amounts greater than the economic order quantity.

Which of the Following Is Correct for a Firm That