Question

In a fixed-order-quantity system, when demand is uncertain, using economic order quantity (EOQ) based only on the average demand will result in a low probability of a stockout. True or False?

Answer 1

Answer:

False

Explanation:

If the demand is uncertain, if you use average demand to calculate the economic order quantity (EOQ), you will have a high probability of a stock-out occurring.  

EOQ = √(2DS / H)

where:

D = annual demand in units

S = order cost per purchase order

H = holding cost per unit, per year

If D is uncertain, then the whole calculus will either be understated or overstated.