The correct answer is: A. Total Ordering Cost.
Economic order quantity (EOQ) is the optimal quantity of goods to order at a time in order to minimize total inventory costs. It is calculated by taking into account the ordering cost, carrying cost, and unit cost of the goods.
The ordering cost is the cost of placing an order, such as the cost of the order form, the cost of shipping the goods, and the cost of the employee’s time to place the order. The carrying cost is the cost of holding inventory, such as the cost of storage space, the cost of insurance, and the cost of obsolescence. The unit cost of the goods is the cost of each item in the order.
The EOQ is calculated using the following formula:
EOQ = â(2DC)/H
where:
D = annual demand
C = ordering cost per order
H = carrying cost per unit per year
The EOQ minimizes the total inventory cost, which is the sum of the ordering cost and the carrying cost. The total inventory cost is calculated using the following formula:
Total Inventory Cost = DC/Q + QH/2
where:
D = annual demand
C = ordering cost per order
Q = EOQ
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