What is the Economic Order Quantity (EOQ) model used to determine?

• A. The optimal service level for inventory.
• B. The optimal order size that minimizes total annual costs of inventory (holding and ordering costs).
• C. The maximum inventory level before stockouts.
• D. The total annual cost of inventory at the current order size.

Answer: (B)

The key idea behind the Economic Order Quantity model is to pick the order size that minimizes total annual inventory costs by balancing fixed ordering costs with variable holding costs. When you order more at a time, you incur fewer orders each year, which lowers ordering costs, but you hold more inventory and pay higher holding costs. When you order smaller amounts, ordering costs rise while holding costs fall. The sweet spot where these two cost streams are equal in impact gives the optimal order quantity.

The formula, Q* = sqrt(2DS/H), captures this balance, where D is annual demand, S is the cost per order, and H is the annual holding cost per unit. The result is the quantity that minimizes total annual inventory costs, rather than addressing service levels, maximum stock, or costs at the current order size.

So the correct choice describes the optimal order size that minimizes total annual costs of inventory (holding and ordering costs). The other options describe concepts not determined by EOQ alone: service level relates to stockouts and safety stock, maximum inventory level is about constraints not in the basic EOQ model, and total cost at the current order size is not the goal of EOQ, which seeks the quantity that minimizes total costs.