Consider the basic EOQ model. If annual demand doubles, what happens to the total annual setup and holding cost?
A) It doubles.
B) It increases by 41.42%.
C) It remains the same.
D) The impact depends upon the value of the setup cost.
E) It quadruples (increases by 400%).

Question

Quizplus · Accepted Answer

In the Economic Order Quantity (EOQ) model, the total cost is minimized at the point where annual setup costs equal annual holding costs. When annual demand doubles, the EOQ increases by the square root of 2 (approximately 1.414), because EOQ is proportional to the square root of the demand. Therefore, both the setup and holding costs increase by 41.42%, not doubling or quadrupling, and this change does not depend on the specific values of setup or holding costs, as it's a relative increase.

Consider the Basic EOQ Model