CPIM Practice Exam

In developing the standard economic order quantity formula, which assumption is made?

1. Demand for the item is subject to only random variation.

2. Replenishment is in split lots.

3. Ordering and carrying costs are subject to normal market variation.

4. Replacement occurs all at once.

The correct answer is: Replacement occurs all at once.

The assumption that replacement occurs all at once is a fundamental aspect of the standard economic order quantity (EOQ) model. This assumption simplifies the inventory management process, implying that when an order is placed, the new stock arrives in full, instantly replenishing the inventory to the desired level. This is crucial for the EOQ formula as it allows for the calculation of optimal order quantity without the complications of partial deliveries, which could affect inventory levels and subsequently influence carrying and ordering costs. In the context of the EOQ formula, this "all at once" replenishment supports the goal of minimizing total inventory costs, which combine both ordering costs (the costs associated with placing orders) and carrying costs (the costs linked with holding inventory). If stocks are replenished unevenly or in split lots, it complicates the inventory management model. Therefore, basing calculations on the assumption of an instantaneous and complete restocking streamlines the process and leads to more straightforward and effective inventory management. This emphasis on instantaneous replenishment contrasts with other scenarios, such as those involving random demand variations or normal market fluctuations in costs, which do not specifically align with the core assumptions of the standard EOQ model.