Ali had previously calculated the Economic Order Quantity required to efficiently control costs at his company. His calculations proved accurate in the short term. However, after a certain point, it was found that his calculations differed from the actual costs. What could have happened at this point to create a mismatch between Ali's calculations and the actual expense?

Question

14-12-2019
Business

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Ali had previously calculated the Economic Order Quantity required to efficiently control costs at his company. His calculations proved accurate in the short term. However, after a certain point, it was found that his calculations differed from the actual costs. What could have happened at this point to create a mismatch between Ali's calculations and the actual expense?

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waidigbenro waidigbenro · Answer 1 · 2019-12-15T20:03:46+01:00

Answer:

The Economic Order Quantity (EOQ) is based on the assumption of the constancy of demand, ordering and holding cost. So if any of these assumption does not remain constant there may be mismatch between calculations and actual expense and this may be what have happened in Ali’s case.

Explanation:

The Economic Order Quantity (EOQ) is the order quantity that minimises the total costs in related to the ordering, receiving, and holding of inventory.

Economic Order Quantity (EOQ) = sqrt of 2DS/H

where:

D=Demand in units

S=Ordering cost per purchase

H=Holding costs per unit per unit of time