Question

Question: Based on an EOQ-type ordering criterion, what cost must be taken to zero if the desire is to have an order quantity of a single unit?

Short answer

Answer

Setup or order cost must be taken to be zero if the desire is to have an order quantity of a single unit.

Step-by-step solution

Definition of EOQ-type ordering criterion

Economic Order Quantity (EOQ), also known as Economic Purchase Quantity (EPQ), can be defined as the order quantity that can reduce the total holding costs and ordering costs in inventory management. It is the oldest classical production scheduling inventory model.

Explanation

Based on an EOQ-type ordering criterion,Setup or ordercost must be taken to be zero if the desire is to have an order quantity of a single unit. Each different product involves obtaining the required materials, equipment setups, paper filling, charging time and materials, and moving out the previous stock of material. Firms must always attempt to reduce these setup costs to allow smaller lot sizes.

Ordering costs refer to the managerial and clerical costs to form the acquisition or production order. Ordering costs involve all details, like counting items and calculating order quantities. The prices are set with maintaining the system that's required to trace orders included in ordering costs.