When using the economic order quantity model
A) ordering costs increase as the level of inventory increases.
B) carrying costs decrease as the level of inventory increases.
C) costs are minimized when total carrying costs and total ordering costs are equal.
D) none of these

Question

Quizplus · Accepted Answer

The economic order quantity model aims to minimize the total cost associated with ordering and holding inventory. This occurs when the total carrying costs (holding inventory) and ordering costs (placing orders) are equal. Therefore, choice C states the correct relationship between costs in the economic order quantity model. Choice A is incorrect because ordering costs do not necessarily increase as inventory increases, and may depend on factors such as setup time and transportation costs. Choice B is also incorrect because carrying costs generally increase as inventory increases (e.g. more space needed, greater risk of obsolescence).

When Using the Economic Order Quantity Model