MANAGEMENT

BUISENESS MANAGEMENT

INVENTORY CONTROL

Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
If the unit cost rises, then optimal order quantity
A
increases
B
decreases
C
either increase or decrease
D
none of these
Explanation: 

Detailed explanation-1: -What is optimal order quantity? Optimal order quantity is the most cost-effective amount of inventory that a business should have at any given time. Put simply, this calculation represents your ideal order size to meet demand without tying up too much working capital in excess stock.

Detailed explanation-2: -Also referred to as ‘optimum lot size, ’ the economic order quantity, or EOQ, is a calculation designed to find the optimal order quantity for businesses to minimize logistics costs, warehousing space, stockouts, and overstock costs. The formula is: EOQ = square root of: [2(setup costs)(demand rate)] / holding costs.

Detailed explanation-3: -An increase in holding cost will increase the EOQ value. In the EOQ formula there is an inverse relationship between setup and carrying costs.

Detailed explanation-4: -When the size of the order increases, the ordering costs (cost of purchasing, inspection, etc.) will decrease whereas the inventory carrying costs (costs of storage, insurance, etc.) will increase. Economic Order Quantity (EOQ) is that size of order which minimizes total annual costs of carrying and cost of ordering.

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