Which two costs are equal at the Economic Order Quantity (EOQ)?

Which two costs are equal at the Economic Order Quantity (EOQ)?

• A. Total Annual Holding Costs and Total Annual Setup Costs
• B. Total Annual Holding Costs and Total Annual Purchasing Costs
• C. Total Annual Purchasing Costs and Total Annual Setup Costs
• D. Total Annual Holding Costs and Total Annual Inventory Costs

Answer: (C)

At the Economic Order Quantity (EOQ), total annual holding costs equal total annual setup costs. This occurs because the EOQ model is designed to find the most cost-effective quantity of inventory to order while minimizing total inventory costs. When a company orders in the EOQ quantity, the costs associated with holding inventory (such as warehousing, insurance, and obsolescence) are balanced by the costs incurred to set up the order (such as ordering costs, which include the costs associated with processing and receiving an order). The model thus reveals the order quantity at which these two costs are equal, leading to reduced overall costs for the operation. Other cost relationships presented in the choices do not hold true at the EOQ point. For instance, total annual purchasing costs remain consistent regardless of the order quantity, as they are based on the price of the goods ordered and the total quantity purchased, rather than on holding or setup costs. This emphasizes the significance of matching holding and setup costs in the EOQ framework.

At the Economic Order Quantity (EOQ), total annual holding costs equal total annual setup costs. This occurs because the EOQ model is designed to find the most cost-effective quantity of inventory to order while minimizing total inventory costs.

When a company orders in the EOQ quantity, the costs associated with holding inventory (such as warehousing, insurance, and obsolescence) are balanced by the costs incurred to set up the order (such as ordering costs, which include the costs associated with processing and receiving an order). The model thus reveals the order quantity at which these two costs are equal, leading to reduced overall costs for the operation.

Other cost relationships presented in the choices do not hold true at the EOQ point. For instance, total annual purchasing costs remain consistent regardless of the order quantity, as they are based on the price of the goods ordered and the total quantity purchased, rather than on holding or setup costs. This emphasizes the significance of matching holding and setup costs in the EOQ framework.