1) Assumptions of EOQ:
– Constant unit price i.e., there is no quantity discounts.
– There is no stockout or back ordering
– Single product is being purchased
– At equilibrium point ordering costs are constant and known
– At equilibrium point demand is constant and known
– At equilibrium point holding costs are constant and known
1 (a) Explain 3 reasons why firms hold inventory:
– To ensure products are available when customers need them. This avoids stockouts and/or lost sales.
– To Manage supply chain uncertainty: holding inventory cushions against delays in supply, production issues, or transportation disruptions.
– Buying purchases reduces unit costs by taking advantage of quantity discount thus firms hold inventory to capitalize on quantity discounts.
1 (b)