Which of the following is true for inventory control
a. Economic order quantity has minimum total cost per order
b. inventory carrying cost increases with quantity per order
c. ordering cost decreases with lot sizes
d. (a) and (b)
e. all of above
The correct answer and explanation is :
The correct answer is d. (a) and (b).
Explanation:
Inventory control is a critical aspect of supply chain management, and several key concepts govern the balance between different costs associated with inventory management. The options provided pertain to well-established principles of inventory control, particularly focusing on the economic order quantity (EOQ) model and how different inventory-related costs interact.
- Economic Order Quantity (EOQ) has minimum total cost per order (Option a):
The EOQ model aims to determine the optimal order quantity that minimizes the total cost of inventory. This total cost is the sum of the ordering cost (cost of placing and receiving orders) and the carrying cost (cost of storing inventory). The EOQ model finds the point at which these two costs are balanced, minimizing the overall inventory cost. Mathematically, the EOQ is the order quantity that minimizes the sum of these costs. Thus, Option (a) is true. - Inventory carrying cost increases with quantity per order (Option b):
Carrying costs are the costs associated with storing inventory, including warehousing, insurance, depreciation, and opportunity costs of having capital tied up in inventory. As the order quantity increases, the amount of inventory on hand also increases, which means the storage costs (carrying costs) will rise. Therefore, Option (b) is true because larger orders mean more inventory to store, leading to higher carrying costs. - Ordering cost decreases with lot sizes (Option c):
Ordering costs are the costs incurred every time an order is placed, such as administrative costs, shipping costs, and inspection costs. Ordering costs decrease as the order quantity increases because fewer orders are needed to meet the demand. While larger lot sizes mean fewer orders, they increase carrying costs. However, Option (c) is incorrect, as ordering costs actually decrease with increasing lot sizes, but the total cost is not minimized unless the right balance between ordering and carrying costs is found. - All of the above (Option e):
Since Option (c) is incorrect, Option (e) is not the correct answer.
Thus, the correct answer is d. (a) and (b), as both statements are true: EOQ minimizes total costs, and carrying costs increase with larger orders.