CMA Intermediate · Cost Accounting · Material Costs
If annual demand and ordering cost per order remain unchanged but carrying cost per unit becomes four times, what happens to the EOQ?
EOQ varies inversely with the square root of carrying cost per unit. When carrying cost becomes four times, EOQ falls by a factor of two, so it halves. One-fourth would ignore the square root.
- AIt doubles
- BIt halvesCorrect
- CIt becomes one-fourth
- DIt becomes four times
Explanation
EOQ is proportional to 1/sqrt(carrying cost). If carrying cost rises four times, EOQ falls by a factor of sqrt(4) = 2, so it halves. One-fourth would wrongly ignore the square root.
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