What does the Economic Order Quantity (EOQ) determine?

What does the Economic Order Quantity (EOQ) determine?

• A. The reorder point for inventory
• B. The number of different products to stock
• C. The quantity of inventory to order each time an order is placed
• D. The minimum stock level required

Answer: (C)

EOQ determines how much to order each time to minimize total inventory costs. It balances the fixed cost of placing orders with the variable cost of holding inventory. The optimal order size Q* is found by the formula Q* = sqrt(2DS/H), where D is annual demand, S is the cost per order, and H is the annual holding cost per unit. Ordering in larger quantities reduces the number of orders but increases holding costs, while ordering in smaller quantities reduces holding costs but raises the number of orders. EOQ focuses on the order quantity, not when to reorder (that’s the reorder point, based on lead time and demand) nor on how many products to stock or minimum stock levels.

EOQ determines how much to order each time to minimize total inventory costs. It balances the fixed cost of placing orders with the variable cost of holding inventory. The optimal order size Q* is found by the formula Q* = sqrt(2DS/H), where D is annual demand, S is the cost per order, and H is the annual holding cost per unit. Ordering in larger quantities reduces the number of orders but increases holding costs, while ordering in smaller quantities reduces holding costs but raises the number of orders. EOQ focuses on the order quantity, not when to reorder (that’s the reorder point, based on lead time and demand) nor on how many products to stock or minimum stock levels.