Question

Economic order quantity aims at minimizing

• A. Ordering cost
• B. Carrying cost
• C. Both
• D. Suppliers cost

Hint:

EOQ is used to minimize the total cost of inventory by balancing ordering and carrying costs.

Answer 1

The Correct Option is C

Step 1: Understanding economic order quantity (EOQ).
Economic Order Quantity (EOQ) is a formula used to determine the optimal order quantity that minimizes both ordering and carrying costs in inventory management. The aim is to find a balance where these two costs are minimized.
Step 2: Analyzing the options.
(A) Ordering cost: This is part of the goal, but EOQ also considers carrying costs.
(B) Carrying cost: This is another part of the goal, but EOQ also aims to minimize ordering costs.
(C) Both: Correct — EOQ minimizes both ordering and carrying costs to achieve the optimal inventory level.
(D) Suppliers cost: EOQ does not directly minimize suppliers’ costs, but focuses on internal inventory-related costs.
Step 3: Conclusion.
The correct answer is (C) Both as EOQ aims at minimizing both ordering and carrying costs.

Answer 2

We can see why the answer is "both" by looking at how the EOQ formula itself is built, rather than just naming what it minimizes.

1. Ordering cost: Ordering cost falls as order size increases (fewer, larger orders mean fewer ordering events), so by itself it would push you toward placing very large, infrequent orders.
2. Carrying cost: Carrying (holding) cost rises as order size increases (larger orders mean more inventory sitting in the warehouse), so by itself it would push you toward placing very small, frequent orders.
3. Both: These two costs move in opposite directions as order quantity changes. The EOQ formula, \( Q^{*} = \sqrt{\dfrac{2DS}{H}} \) (where \(D\) is annual demand, \(S\) is ordering cost per order, and \(H\) is carrying cost per unit), is derived precisely at the point where total ordering cost equals total carrying cost, which is also where their sum (total inventory cost) is at its minimum.
4. Suppliers cost: Supplier-side costs (like a supplier's own production or transport cost) are not a variable that the EOQ model optimizes for the buyer; EOQ is concerned only with the buyer's own ordering and holding costs.

Because the EOQ quantity is defined as the exact order size where the ordering-cost curve and the carrying-cost curve intersect and their sum is smallest, it minimizes both simultaneously, not just one of them.

Therefore, the correct answer is Both.