CPIM Practice Exam

What is a critical factor in determining the economic order quantity?

1. Average demand rate

2. Total number of items

3. Length of lead time

4. Carrying cost per unit

The correct answer is: Average demand rate

The economic order quantity (EOQ) is a fundamental inventory management concept aimed at minimizing the total costs associated with ordering and holding inventory. One of the critical factors in determining the EOQ is the average demand rate. This factor is integral because it influences how much inventory is needed to meet customer demand without incurring excess costs. When calculating EOQ, the average demand rate helps to establish the optimal order size that strikes a balance between ordering costs (costs incurred each time an order is placed) and carrying costs (cost of holding inventory). A higher demand rate typically results in a larger order quantity to ensure sufficient stock is available, whereas a lower demand rate might suggest a smaller order size. Thus, accurately assessing the average demand allows businesses to make informed decisions about how frequently and how much to order, ensuring they can meet customer needs while also minimizing overall costs. While factors such as total number of items, length of lead time, and carrying cost per unit are important in the broader context of inventory management, they do not play as pivotal a role in the EOQ formula as the average demand rate does. Each of these other factors can influence inventory decisions but do not have the same direct impact on calculating the optimal order quantity itself. Understanding the average demand