In the EPQ model,the total annual cost equation is minimized at ______.
A)the point of intersection of the total production and holding cost curves
B)the point of intersection of the total setup and holding cost curves
C)the point of intersection of the total ordering and holding cost curves
D)the point of intersection of the total production and setup cost curves

Question

Quizplus · Accepted Answer

In the EPQ model, the total annual cost equation is given by the sum of the total setup cost, total ordering cost, and total holding cost. The total setup cost curve represents the cost of setting up a production run, the total ordering cost curve represents the cost of placing an order, and the total holding cost curve represents the cost of storing inventory. The total annual cost is minimized when the sum of these costs is at its lowest point. This occurs at the point of intersection of the total setup and holding cost curves, as this is where the setup cost - which favors large production runs - and the holding cost - which favors smaller production runs - are balanced. Therefore, the best choice is B.

In the EPQ Model,the Total Annual Cost Equation Is Minimized