How to approach it
- Sensitivity items: write the formula and plug in index numbers (1.06, 1.08) rather than full data.
- Outsourcing under a constraint: rank by extra cost of buying per limiting-factor hour saved; outsource the lowest.
- 'Always' statements about absorption vs marginal profit are usually false; check what happens when inventory falls.
Key rules to apply
- EOQ = √(2DCo ÷ Ch): EOQ moves with √(Co ÷ Ch).
- Batch-level costs (set-ups) are driven by the number of batches, not units.
- Absorption profit exceeds marginal profit only when inventory rises.
Common mistakes
Drawn from the examiners' comments for this sitting (summarised in our words) and from typical errors on this topic.
- Adding percentage changes in EOQ inputs instead of taking the square root of the ratio.
- Allocating set-up costs on units produced.
Similar question with worked solution
Written by us with our own numbers; it tests the same skills as Q1 without copying it.
Original practice question
EOQ sensitivity
Case 1: ordering cost per order rises 21%, holding cost unchanged. Case 2: ordering cost rises 8% and holding cost per unit rises 20%. Demand is unchanged in both.
Required: Calculate the percentage change in EOQ in each case.
Worked solution
| Case | Working | Change |
|---|---|---|
| 1 | √1.21 = 1.10 | +10% |
| 2 | √(1.08 ÷ 1.20) = √0.90 = 0.9487 | −5.1% |
Answer: +10% and about −5.1%.