In the basic economic order quantity model and in the production order quantity model, optimal behaviour occurs where annual setup costs equal annual holding costs. Is this a coincidence, or a fundamental element of these models? Answer in a well-constructed paragraph.

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Davion Parker · Accepted Answer

Final Answer : This equality is not a coincidence. It follows from the objective of both models, which is the minimization of total inventory costs for that product. In both of these models, total cost minimization occurs where the setup cost and holding cost elements intersect. The formulas for Q∗ and Q∗P follow from that point of equality.

In the basic economic order quantity model and in the production order quantity model, optimal behaviour occurs where annual setup costs equal annual holding costs. Is this a coincidence, or a fundamental element of these models? Answer in a well-constructed paragraph.

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