Which of the following statements about the basic Economic Order Quantity (EOQ) model is true?

• A. The EOQ model minimizes the total cost by balancing ordering and holding costs.
• B. The EOQ model incorporates quantity discounts in its calculation.
• C. The EOQ model assumes that demand fluctuates randomly over time.
• D. The EOQ model is used to determine the optimal price for a product.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the purpose of the Economic Order Quantity (EOQ) model. EOQ is designed to find the optimal order quantity that minimizes the total inventory costs, which include ordering costs and holding costs.
2. Step 2: Recall the components of total cost in the EOQ model: Total Cost = Ordering Cost + Holding Cost. Ordering cost decreases with larger order sizes, while holding cost increases with larger order sizes.
3. Step 3: Recognize that the EOQ model assumes constant and known demand, not random fluctuations, and does not directly incorporate quantity discounts or pricing decisions.
4. Step 4: Evaluate each statement based on EOQ assumptions: The model balances ordering and holding costs to minimize total cost (true), it does not incorporate quantity discounts in its basic form, it assumes constant demand rather than random fluctuations, and it is not used to determine product price.
5. Step 5: Conclude that the true statement is the one about EOQ minimizing total cost by balancing ordering and holding costs.