Which statement about the EOQ model is true?

• A. It minimizes only carrying costs.
• B. It ignores ordering costs.
• C. It balances annual carrying costs and annual ordering costs.
• D. It is used only for perishable items.

Answer: (C)

The EOQ model is about choosing an order quantity that minimizes total annual cost by balancing the costs of ordering with the costs of holding inventory. Ordering in larger lots reduces how often you pay the fixed ordering cost, but it increases the amount of inventory you carry and thus the holding cost. Ordering in smaller lots lowers holding costs but increases the number of orders and thus the total ordering cost. The sweet spot is where these two cost components are balanced, giving the lowest overall cost for the year. This is why the true statement says it balances annual carrying costs and annual ordering costs.

For context, EOQ assumes steady demand, a fixed cost to place an order, a fixed holding cost per unit per year, and no stockouts. It’s not limited to perishable items, and it does not minimize carrying costs alone or ignore ordering costs.