Qtn.1.

Following are the underlying assumptions for the EOQ model. Without these assumptions, the EOQ
model cannot work to its optimal potential.

 The cost of the ordering remains constant.

 The demand rate for the year is known and evenly spread throughout the year.

 The lead time is not fluctuating (lead time is the latency time it takes a process to initiate and
complete).

 No cash or settlement discounts are available, and the purchase price is constant for every item.

 The optimal plan is calculated for only one product.

 There is no delay in the replenishment of the stock, and the order is delivered in the quantity
that was demanded, i.e. in whole batch.

These underlying assumptions are the key to the economic order quantity model, and these
assumptions help the companies to understand the shortcomings they are incurring in the application of
this model. 

Following is the formula for the economic order quantity (EOQ) model:

Where Q = optimal order quantity

D = units of annual demand

S = cost incurred to place a single order or setup

H = carrying cost per unit

This formula is derived from the following cost function:

Total cost = purchase cost + ordering cost + holding cost

Limitations of the economic order quantity model:

It is necessary for the application of EOQ order that the demands remain constant throughout the year.
It is also necessary that the inventory be delivered in full when the inventory levels reach zero.

Qtn.2.Economic order quantity (EOQ) model is the method that provides the company with an order
quantity. This order quantity figure is where the record holding costs and ordering costs are minimized.
By using this model, the companies can minimize the costs associated with the ordering and inventory
holding. And as per this question 2 EOQ can be implemented only when the underlying assumptions
mentioned in answer question one are realized or instigated by the company as outline above case one.
Qtn.3
Costs associated with inventory are generally categorized as either direct costs or indirect costs.

Material Costs

The cost of the actual inventory is considered a direct cost. Companies must purchase inventory in order
to resell it, and most companies must have it in stock so that it is available to sell to customers.
Companies must examine inventory levels often to keep the right amount in stock at all times. By having
too little inventory, companies can miss sale opportunities. If a company has too much inventory, its
money is tied up in it, possibly causing a negative cash flow. The cost for the money tied up in inventory
is referred to as an indirect cost directly associated with inventory.

Transportation Costs

Another direct cost associated with inventory is the cost of freight. To have inventory, a company must
either pick it up or have it shipped. These costs generally are not free and usually the purchaser is
responsible for paying them.

Carrying Costs

The last type of direct cost associated with inventory is called carrying costs. These are costs that relate
to storing and moving the inventory goods. To store inventory, a business must have a warehouse or
stockroom. Along with the cost of the warehouse are costs for insurance, salaries and taxes. All costs
related to storing, moving and handling the goods are included in carrying costs.

Shrinkage

Shrinkage is a common problem for businesses with inventory. Shrinkage refers to inventory that is
missing, stolen or damaged. This is not commonly detected until a physical inventory count is taken. At
that time, the amount of inventory the company should have is greater than the inventory the company
actually has. This indirect cost causes the price of goods to increase to make up for the cost of goods
breaking or disappearing.

Costs associated with inventory are generally classified into two categories: direct costs and indirect
costs.

Cost of materials

The cost of the actual inventory is considered a direct cost. Businesses need to buy inventory to be able
to resell it, and most businesses must have it in stock to sell to their customers. Companies often have
to look at inventory levels to keep the right amount in stock at all times. By having too little inventory,
companies can miss sales opportunities. If a company has too many stocks, its money gets stuck, which
can lead to negative cash flow. The cost of locked-in cash is called an indirect cost directly associated
with inventory.

Transport costs
Another direct cost associated with inventory is the cost of freight. To have an inventory, a company
must either pick it up or have it shipped. These costs are generally not free and it is usually up to the
buyer to pay for them.

Shipping

The last type of direct cost associated with inventory is called carry costs. These are costs related to the
storage and movement of goods in stock. To store inventory, a company must have a warehouse or
warehouse. In addition to the costs of the warehouse, the costs related to insurance, wages and taxes.
All costs associated with the storage, moving and handling of the goods are included in the shipping
costs.

Narrowing

Withdrawal is a common problem for companies with inventory. Withdrawal refers to missing, stolen or
damaged inventory. This is not commonly detected until a physical inventory account is taken. At that
point, the amount of inventory that the company should have is greater than the actual inventory of the
company. This indirect cost increases the price of goods to offset the cost of goods that are broken or
disappearing.