Which of the following best defines the holding cost in the Economic Order Quantity (EOQ) model?

• A. The cost incurred for storing and maintaining inventory over a period of time.
• B. The cost paid to suppliers for purchasing inventory.
• C. The cost of placing an order for additional inventory.
• D. The cost associated with running out of stock and losing sales.

Answer: (A)

Verified step by step guidance

1. Understand that the Economic Order Quantity (EOQ) model is used to determine the optimal order size that minimizes total inventory costs.
2. Identify the different types of costs involved in the EOQ model: ordering costs, holding costs, and shortage costs.
3. Recognize that holding cost refers specifically to the expenses related to storing and maintaining inventory over time, such as warehousing, insurance, and depreciation.
4. Distinguish holding cost from ordering cost, which is the cost of placing an order, and shortage cost, which is the cost of running out of stock.
5. Conclude that the holding cost is best defined as the cost incurred for storing and maintaining inventory over a period of time.