Certified Management Accountant 2025 – 400 Free Practice Questions to Pass the Exam

The Economic Order Quantity (EOQ) model is a fundamental inventory management tool that aims to determine the most efficient order quantity a company should purchase to minimize total inventory costs. This model considers factors such as demand, holding costs, and ordering costs to identify the optimal order quantity.

The correct formula for the EOQ is derived by balancing the trade-off between holding costs (the costs associated with storing inventory) and ordering costs (the costs incurred each time an order is placed). The traditional EOQ formula is:

EOQ = √((2 × Demand × Ordering Cost) / Holding Cost)

This formula reflects that the Economic Order Quantity increases with higher demand and ordering costs while decreasing as holding costs rise. The square root indicates the relationship between these variables, emphasizing how changes in demand or cost factors affect the optimal order quantity.

In terms of context, options that suggest incorrect formulae do not capture this balance accurately. The formula in choice A incorrectly simplifies the relationship without incorporating the cost to process orders. Choice C does not represent any common inventory or EOQ-related concepts correctly, as it suggests an average order divided by holding costs without further context. Lastly, choice D conflates different cost components that do not logically lead to the calculation of an optimal order quantity.