CMA Intermediate · Financial Management and Business Data Analytics · Inventory Management
In the basic EOQ model, if annual demand rises to four times the original while ordering cost per order and carrying cost per unit stay unchanged, what happens to the EOQ?
The EOQ doubles. The formula uses the square root of demand, so a fourfold rise in annual demand increases the order quantity by the square root of four, which is two, when ordering and carrying costs are unchanged.
- AIt doublesCorrect
- BIt quadruples
- CIt rises by 50%
- DIt stays unchanged
Explanation
EOQ is proportional to the square root of demand. Quadrupling demand multiplies EOQ by sqrt(4) = 2, so it doubles. Quadrupling would wrongly assume a linear relationship.
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