The primary purpose of the basic economic order quantity model is

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 ordering cost and holding cost

Answer: (D)

The main idea behind the basic EOQ model is to find the order size that minimizes the total annual costs associated with ordering and holding inventory. Ordering cost is a fixed cost every time you place an order, while holding (carrying) cost is the expense of keeping inventory on hand per unit per year. If you place many small orders, you pay many ordering costs; if you order in large batches, you hold more stock and incur higher holding costs. The optimal order quantity balances these two, giving the lowest total cost for ordering and holding. That’s why the best answer states minimizing the sum of ordering costs and holding costs. The reorder point tells you when to reorder, not how much to order; service level relates to satisfying demand, not the cost-minimization objective; and carrying/holding costs alone don’t capture the trade-off with ordering costs.

The main idea behind the basic EOQ model is to find the order size that minimizes the total annual costs associated with ordering and holding inventory. Ordering cost is a fixed cost every time you place an order, while holding (carrying) cost is the expense of keeping inventory on hand per unit per year. If you place many small orders, you pay many ordering costs; if you order in large batches, you hold more stock and incur higher holding costs. The optimal order quantity balances these two, giving the lowest total cost for ordering and holding.

That’s why the best answer states minimizing the sum of ordering costs and holding costs. The reorder point tells you when to reorder, not how much to order; service level relates to satisfying demand, not the cost-minimization objective; and carrying/holding costs alone don’t capture the trade-off with ordering costs.