Use of a fixed order quantity model is most likely to be effective in which of the following cases?

Calculating Economic Order Quantity

The following formula is used to calculate the EOQ:

Economic Order Quantity:
√(2 x S x D)/H

Annual Demand (D)

The Annual demand is the number of units that you sell annually. If actual units are not available, then you can use expected sales figure based on your sales trend.

Order cost (S)

This refers to the costs that are involved with an order but cannot be directly associated with the purchase cost.

Holding cost (H)

This refers to all the costs that are involved in storing or handling the items in your store or warehouse. Usually, holding costs are fixed in nature.

What are the components of Economic Order Quantity?

Annual Demand Calculation (D)

The Annual demand is the number of units that you sell annually. If actual units are not available, then you can use expected sales figure based on your sales trend.

The following table will give you a better idea about what the other factors are that can have an impact on demand and your business operations:

Market conditions

• Change in customer taste
• Competition
• Shift in industry standards

Economic conditions

• Change in tax rate
• Trade regulations, domestic and international
• Monetary policy

Order Cost Calculation (S)

This refers to the costs that are involved with an order but cannot be directly associated with the purchase cost.

• ► Transport charges and custom duties incurred during the movement of the items
• ► Clerical charges paid to an outsourced agency for recording transaction
• ► Salary paid to the quality check team before the items enter your warehouse
• ► Amount spent in setting up a machine or equipments

Holding cost calculation (H)

This refers to all the costs that are involved in storing or handling the items in your store or warehouse. Usually, holding costs are fixed in nature.

• ► Monthly rent for the shop or warehouse that you use to store items
• ► Employees salary and warehouse labor wages
• ► Electricity and insurance cost

Assumptions while calculating EOQ

The EOQ is a great metric for any business dealing with the buying and selling of goods. However, it's important to remember the assumptions that the EOQ formula is based on:

The bottom line

Economic Order Quantity may not consider all the factors that affect each business, but it is still a powerful tool to help an entrepreneur or manager to make more calculated decisions. What makes the EOQ a compelling tool is that it is dynamic and can be revisited from time to time as your business grows. If there's a change in any of your inventory costs, you can always tweak the formula and generate a new EOQ to suit the current conditions.

Calculating the EOQ for your business helps you find a good balance for your order and inventory costs, which are easy to overlook in day-to-day business. The EOQ formula shouldn't be taken as gospel, but it's a useful tool for informed, effective inventory control.

Which of the following is not one of the assumptions of the basic EOQ model?

Quantity discounts are available.

Which of the following interactions with vendors would potentially lead to inventory reductions?

A non-linear cost related to order size is the cost of?

In a two bin inventory system, the amount in the second bin is equal to the?

Which of the following is least likely to be included in order costs?

Temporary storage of delivered goods.

In an A-B-C system, the typical percentage of the number of items in inventory for A items is about?

In the A-B-C classification system, items which account for fifteen percent of the total dollar-volume for a majority of the inventory items would be classified as:

In the A-B-C classification system, items which account for sixty percent of the total dollar-volume for few inventory items would be classified as:

The purpose of cycle counting is to?

Reduce discrepancies between inventory records and actual.

The EOQ model is most relevant for which one of the following?

Determining fixed order quantities.

Which is not a true assumption of the EOQ model?

No more than 3 items are involved.

In a supermarket, a vendor's restocking the shelves every Monday morning is an example of:

A cycle count program will usually require that ‘A' items be counted:

More frequently than annually.

In the basic EOQ model, if lead time increases from five to 10 days, the EOQ will:

The introduction of quantity discounts will cause the optimum order quantity to be:

A fill rate is the percentage of _____ filled by stock on hand.

In the quantity discount model, with carrying cost stated as a percentage of unit purchase price, in order for the EOQ of the lowest curve to be optimum, it must:

Which one of the following is not generally a determinant of the reorder point?

If no variations in demand or lead time exist, the ROP will equal:

Expected usage during lead time.

Which one of the following is implied by a "lead time" service level of 95 percent?

The probability is 95 percent that demand during lead time will not exceed the amount on hand at the beginning of lead time.

All of the following are possible reasons for using the fixed order interval model except:

The required safety stock is lower than with an EOQ/ROP model.

Which of these products would be most apt to involve the use of a single-period model?

The management of supply chain inventories focuses on?

Both internal and external inventories.

Cycle stock inventory is intended to deal with?

An operations strategy which recognizes high carrying costs and reduces ordering costs will result in:

Greatly decreased order quantities.

With an A-B-C system, an item that had a high demand but a low annual dollar volume would probably be classified as:

The fixed order interval model would be most likely to be used for this situation?

Grouping orders can save shipping costs.

Which item would be least likely to be ordered under a fixed order interval system?

Auto parts at an assembly plant.

Which one of these would not be a factor in determining reorder point?

Which of the following situation will the fixed order interval model would be most likely to be used?

What is fixed order quantity model?

Which of the following is the EOQ model most relevant to?

What is EOQ model used for?