If a factory wants to cut its current lot size in half, by what proportion must setup cost change?
A) Setup cost must be cut to one fourth its current value.
B) Setup cost must also be cut in half from its current value.
C) Setup cost must double from its current value.
D) Cannot be determined.
E) Setup cost must quadruple from its current value.

Question

Quizplus · Accepted Answer

The Economic Order Quantity (EOQ) model suggests that the optimal lot size is inversely proportional to the square root of the setup (or ordering) cost. Therefore, to cut the lot size in half, the setup cost must be reduced to one-fourth. This is because the square root of 1/4 is 1/2, matching the desired reduction in lot size.

If a Factory Wants to Cut Its Current Lot Size