Which statement is true regarding the Economic Production Quantity (EPQ) model?

• A. The EPQ model is only applicable when there are no setup costs.
• B. The EPQ model assumes instantaneous replenishment of inventory.
• C. The EPQ model assumes that inventory is replenished gradually as items are produced.
• D. The EPQ model ignores holding costs in its calculations.

Answer: (C)

Verified step by step guidance

1. Understand the Economic Production Quantity (EPQ) model: it is an inventory management model used to determine the optimal production quantity that minimizes total costs, including setup and holding costs.
2. Recall that the EPQ model differs from the Economic Order Quantity (EOQ) model by assuming that inventory is replenished gradually during the production process, not instantaneously.
3. Recognize that the EPQ model explicitly includes setup costs and holding costs in its calculations, as these are critical components in determining the optimal production quantity.
4. Analyze each statement: the EPQ model is not limited to scenarios without setup costs; it does not assume instantaneous replenishment; it does consider holding costs; and it does assume gradual replenishment during production.
5. Conclude that the true statement is: 'The EPQ model assumes that inventory is replenished gradually as items are produced.'