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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

Sharpe Knife Company expects sales next year to be \(1,550,000 if the economy is strong, \)825,000 if the economy is steady, and $550,000 if the economy is weak. Mr. Sharpe believes there is a 30 percent probability the economy will be strong, a 40 percent probability of a steady economy, and a 30 percent probability of a weak economy. What is the expected level of sales for the next year?

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April

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