The Economic Order Quantity (EOQ) model is described as which of the following?

• A. A qualitative method to forecast demand
• B. A quantitative decision model balancing annual carrying costs and annual order costs
• C. A system to classify items by importance
• D. A model to determine safety stock levels

Answer: (B)

The main concept tested is that EOQ is a quantitative decision model used to find the optimal order quantity that minimizes total inventory costs by balancing annual carrying (holding) costs with annual ordering costs. If you order in larger batches, you pay less in ordering costs because you place fewer orders, but you hold more inventory, which drives up holding costs. If you order more frequently in smaller amounts, ordering costs go down, but holding costs rise due to more frequent stock being kept on hand. The optimal point minimizes the sum of these two cost components.

EOQ has a standard formula, Q* = sqrt(2DS/H), where D is annual demand, S is the cost per order, and H is the annual holding cost per unit. This captures the trade-off numerically and gives the quantity that minimizes total annual inventory costs.

It’s not about qualitative forecasting, item classification, or setting safety stock levels, which are separate concepts. EOQ focuses on choosing a single order quantity that balances costs under steady, predictable conditions.