Which issue is addressed by the EOQ model?

Which issue is addressed by the EOQ model?

• A. Maximizing service level
• B. Minimizing total inventory costs by balancing ordering costs and holding costs
• C. Setting maximum inventory capacity
• D. Controlling stockouts only

Answer: (B)

The EOQ model focuses on selecting how much to order each time so that total inventory costs are as low as possible. It treats two cost forces as the key drivers: the fixed cost of placing an order, which pushes toward larger, less frequent orders, and the cost of holding inventory, which pushes toward smaller, more frequent orders. By expressing total annual cost as the sum of ordering costs (D/Q × S) and holding costs (Q/2 × H) and minimizing with respect to Q, you obtain the quantity that best balances these opposing costs. In simple terms, it minimizes total inventory costs by balancing ordering costs and holding costs. This is why the answer is that EOQ minimizes total inventory costs by balancing ordering costs and holding costs. The model doesn’t inherently aim to maximize service level, set a maximum storage capacity, or address stockouts alone; those involve safety stock, capacity constraints, or service-level targets beyond the basic cost-minimization focus.

The EOQ model focuses on selecting how much to order each time so that total inventory costs are as low as possible. It treats two cost forces as the key drivers: the fixed cost of placing an order, which pushes toward larger, less frequent orders, and the cost of holding inventory, which pushes toward smaller, more frequent orders. By expressing total annual cost as the sum of ordering costs (D/Q × S) and holding costs (Q/2 × H) and minimizing with respect to Q, you obtain the quantity that best balances these opposing costs. In simple terms, it minimizes total inventory costs by balancing ordering costs and holding costs.

This is why the answer is that EOQ minimizes total inventory costs by balancing ordering costs and holding costs. The model doesn’t inherently aim to maximize service level, set a maximum storage capacity, or address stockouts alone; those involve safety stock, capacity constraints, or service-level targets beyond the basic cost-minimization focus.