[RWani]

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)