Which costs does EOQ aim to minimize?

Which costs does EOQ aim to minimize?

• A. Ordering costs and holding costs.
• B. Purchasing costs only.
• C. Storage costs only.
• D. Labor costs only.

Answer: (A)

EOQ focuses on costs that change with how much you order. The goal is to minimize the total of ordering costs (costs incurred each time you place an order) and holding costs (costs to keep inventory on hand, such as storage and capital tied up). By selecting an order quantity, you trade off more frequent orders (lower average inventory, higher ordering costs) against fewer orders (higher average inventory, lower ordering costs). The point where these two hold-and-order costs are balanced gives the minimum total cost. Purchasing costs are usually treated as constant per unit in the basic EOQ model and don’t change with order size, so they aren’t what EOQ minimizes. Storage costs are part of holding costs, and labor costs aren’t part of the standard EOQ calculation.

EOQ focuses on costs that change with how much you order. The goal is to minimize the total of ordering costs (costs incurred each time you place an order) and holding costs (costs to keep inventory on hand, such as storage and capital tied up). By selecting an order quantity, you trade off more frequent orders (lower average inventory, higher ordering costs) against fewer orders (higher average inventory, lower ordering costs). The point where these two hold-and-order costs are balanced gives the minimum total cost.

Purchasing costs are usually treated as constant per unit in the basic EOQ model and don’t change with order size, so they aren’t what EOQ minimizes. Storage costs are part of holding costs, and labor costs aren’t part of the standard EOQ calculation.