Question

Daniel Trumpe has computed the EOQ for a product he sells to be 400 units. However, due to recent events he has a cash flow problem. Therefore, he orders only 100 units each time he places an order. Which of the following is true for this situation?
A. Annual ordering cost will be lower than annual holding cost.
B. Annual ordering cost will be higher than annual holding cost.
C. Annual ordering cost will equal annual holding cost.
D. Annual ordering cost will be unaffected by the order policy change.
E. Nothing can be determined without more information.

Answer 1

Answer:

The answer is: A) Annual ordering cost will be lower than annual holding cost.

Step-by-step explanation:

The economic order quantity (EOQ) refers to the optimum quantity a business should buy of a product in or to minimize ordering and holding costs. The formula for calculating EOQ is:

√[(2 x annual demand in units x ordering costs)÷ annual holding cost per unit]

If EOQ is 400, but Daniel can only buy 100 units, then the divisor will be larger. In this case the divisor is the annual holding cost per unit.