Question

The primary purpose of the basic economic order quantity model is
a. to calculate the reorder point, so that replenishments take place at the proper time
b. to minimize the sum of carrying cost and holding cost
c. to maximize the customer service level
d. to minimize the sum of setup cost and holding cost e. to calculate the optimum safety stock

Answer 1

Answer:

D. to minimize the sum of setup cost and holding cost e. to calculate the optimum safety stock

Explanation:

Economic order quantity ( EOQ ) is formulated as :

$EOQ= \sqrt[]{\frac{2C_O D}{C_h} }$

Co = Ordering cost

D = annual demand

Ch = Annual unit holding cost

Economic quantity is the order quantity which minimizes sum of annual cost of ordering and annual inventory holding cost  so to minimize the overall cost of the inventory.

ANSWER : d) to minimize the sum of setup cost and holding cost that is to calculate the optimum safety stock.

Answer 2

To minimize the sum of setup cost and holding cost is the primary purpose.

Economic Order Quantity or Economic Purchase Quantity, is the demand amount that reduces the ordering costs and total holding costs in stock management.

What is the primary purpose of the model?

The Economic Purchase Quantity or EOQ can be given by the formula:

$\rm EOQ = \sqrt{\frac{2C_{o}D}{C_{h}} }$

Where, $\rm C_{o}$= cost of the order, D = Yearly demand and $\rm C_{h}$ = yearly unit holding cost.

It reduces the total yearly ordering cost and the yearly stock holding cost so that the overall cost of the inventory gets reduced.

Therefore, option d is correct.

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