ECONOMICS

Detailed explanation-1: -The simplest version of the Economic Order Quantity model incorporates only ordering costs, carrying costs, and purchasing costs into the calculation. To determine the Economic Order Quantity, the relevant ordering costs are minimized and the relevant carrying costs are maximized.

Detailed explanation-2: -Those costs include warehousing and logistical costs, insurance costs, material handling costs, inventory write-offs, and depreciation. Ordering a large amount of inventory increases a company’s holding costs while ordering smaller amounts of inventory more frequently increases a company’s setup costs.

Detailed explanation-3: -Ordering costs are costs that are incurred to obtain additional inventories, whereas carrying costs are the costs incurred to hold inventory on hand. The total inventory cost is the ordering cost plus the carrying cost.

Detailed explanation-4: -The larger the order quantity, the lower the annual relevant ordering costs and the higher the annual relevant carrying costs. The economic order quantity increases with higher demand and higher carrying costs and decreases with higher ordering costs.

Detailed explanation-5: -The EOQ assumes that the demand for your products will remain constant throughout the year.