Which of the following is an assumption of economic-order-quantity model?

Which of the following is an assumption of economic-order-quantity model?
A . The quantity ordered can vary at each reorder point
B . Demand, ordering costs, and carrying costs are uncertain
C . No inventory stockouts occur
D . The purchasing cost per unit is affected by the order quantity

View Answer

Answer: C

Explanation:

Economic order quantity (EOQ) model is the method that provides the company with an order quantity. This order quantity figure is where the record holding costs and ordering costs are mini-mized. By using this model, the companies can minimize the costs associated with the ordering and inventory holding. In 1913, Ford W. Harris developed this formula whereas R. H. Wilson is given credit for the application and in-depth analysis on this model.

If the economic order quantity model is applied, the following assumptions should be met:

– The rate of demand is constant, and total demand is known in advance.

– The ordering cost is constant.

– The unit price of inventory is constant, i.e., no discount is applied depending on order quantity.

– Delivery time is constant.

– Replacement of defective units is instantaneous.

– There is no safety stock level, i.e., the minimum stock level is zero.

– Restocking is made by the whole batch.

Because the demand and lead time are constant, no stockout events can occur.

Reference: CIPS study guide page 113-114

LO 2, AC 2.3