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What does the EOQ formula tell us? What assumption is made about the usage rate for inventory?

Short Answer

Expert verified

The EOQ reflects an optimum level of inventory that should be ordered to minimize the inventory cost by an organization. It assumes that the inventory is consumed at a constant rate.

Step by step solution

01

The information provided by the EOQ

The EOQ formula states the inventory quantity to be ordered, which will result in minimum inventory cost for the organization. This formula considers the ordering cost, carrying cost, and the average order quantity.

02

The assumptions made in EOQ

The EOQ formula assumes that the inventory will be utilized at a constant rate for a specified time and every order. This assumption does not consider the changes in the usage rate of inventory.

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Most popular questions from this chapter

What are three theories for describing the shape of the term structure of interest rates (the yield curve)? Briefly describe each theory.

In the second year, Fisk Corporation finds that it can reduce ordering costs to \(2 per order but that carrying costs stay the same at \)1.60 per unit. Also, volume remains at 49,000 units per year.

b. How many orders will be placed during the year?

What does the term structure of interest rates indicate?

Neon Light Company of Kansas City ships lamps and lighting appliances throughout the country. Ms. Neon has determined that through the establishment of local collection centers around the country, she can speed up the collection of payments by three days. Furthermore, the cash management department of her bank has indicated to her that she can defer her payments on her accounts by one-half day without affecting suppliers. The bank has a remote disbursement center in Florida.

b. If Neon Light Company can earn 6 percent per annum on freed-up funds, how much will the income be?

Neon Light Company of Kansas City ships lamps and lighting appliances throughout the country. Ms. Neon has determined that through the establishment of local collection centers around the country, she can speed up the collection of payments by three days. Furthermore, the cash management department of her bank has indicated to her that she can defer her payments on her accounts by one-half day without affecting suppliers. The bank has a remote disbursement center in Florida.

c. If the total cost of the new system is $400,000, should it be implemented?

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