Considering the EOQ model, larger lots are justified with higher holding costs.

Question

BlackTom AI · Accepted Answer

In order to evaluate the statement, we need to recall the Economic Order Quantity (EOQ) framework and how holding costs interact with order quantities.
Option 1: 'True' — Larger lots are justified with higher holding costs. This would imply that increasing the carrying cost makes it sensible to stock even more inventory. In the EOQ model, however, higher holding costs actually discourage large lot sizes because the objective is to minimize total annual cost, which is the sum of setup/order costs and holding costs. When holding costs rise, the optimal order quantity tends to decrease, not increase, since carrying extra units becomes more expensive.
Option 2: 'False' — Larger lots are justified with higher holding costs. This statement is inconsistent with the EOQ logic. As holding costs rise, the penalty for holding inventory grows, so the model leans toward smaller lot sizes to reduce average on-hand inventory and its costs. The fundamental trade-off is between ordering costs (which favor larger, less frequent orders) and holding costs (which favor smaller, more frequent orders). Therefore, higher holding costs would not justify larger lots.
Option 3: 'True' — A deeper misinterpretation might be to conflate any cost increase with a justification for more inventory, but EOQ specifically balances those two components. If holding costs go up, the balance shifts toward smaller quantities to minimize carrying expense, not toward larger lots.
Option 4: 'False' — The essence of the EOQ decision rule is that increasing holding costs reduces the optimal order quantity, since the carrying cost per unit-time is a larger component of total cost. Consequently, larger lot sizes are not justified when holding costs rise.
By unpacking the cost components and the objective of EOQ, we see that the statement claiming larger lots are justified by higher holding costs conflicts with the model’s core trade-off and is therefore incorrect.

MGS310001.2025FA Test 03: Chap 10,11

Considering the EOQ model, larger lots are justified with higher holding costs.

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Similar Questions

Question at position 22 Given the following information, what is the EOQ for this company: Average demand per week = 135 The ordering cost = $135 The inventory holding rate per year = 4% Unit cost = $50 Assume 50 weeks per year975 units955 units305 units191 units

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EOQ should be used if you use a make-to-order strategy and the customer specifies that the entire order be delivered in one shipment.

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MGS*3100*01.2025FA Test 03: Chap 10,11

Considering the EOQ model, larger lots are justified with higher holding costs.

View Explanation

Log in for full answers

Similar Questions

Question at position 22 Given the following information, what is the EOQ for this company: Average demand per week = 135 The ordering cost = $135 The inventory holding rate per year = 4% Unit cost = $50 Assume 50 weeks per year975 units955 units305 units191 units

Question at position 20 The annual demand of a certain item is 5,400 units and the computed EOQ is 900 units. What will be the time between orders in months?6 months 4 months3 months 2 months

EOQ should be used if you use a make-to-order strategy and the customer specifies that the entire order be delivered in one shipment.

An item experiences an annual demand of 3,600 units. It costs $10 to hold an item in inventory for one year and $20 to place an order. If the EOQ model is used, what is the time between orders? Assume that there are 52 business weeks in a year.

The EOQ is the smallest lot size that a supplier will allow a customer to order.

More Practical Tools for Students Powered by AI Study Helper

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MGS310001.2025FA Test 03: Chap 10,11