Which is an underlying assumption of EOQ models?

• A. Demand is Perfectly Variable
• B. There Are Stockouts Allowed
• C. Demand is Constant
• D. Holding Costs Vary with Order Size

Answer: (C)

The main idea behind EOQ is a steady, known demand rate so you can balance the costs of ordering versus holding inventory. When demand is constant, you can predict how often you’ll need to place orders and how much inventory will be on hand on average, allowing the total annual cost to be minimized at a specific order quantity. If demand varied, the time between orders would fluctuate and the simple trade-off used to derive the EOQ wouldn’t hold. Stockouts aren’t part of the basic model, since backorders add another cost component not accounted for in the classic formulation. Similarly, if holding costs changed with order size, the linear relationship that underpins the EOQ calculation would break. So the assumption that makes the model work is constant demand.