University of Central Florida (UCF) ENT4412 Managing Small Business Finances Final Practice Exam

The economic order quantity (EOQ) model is specifically designed to determine the optimal order quantity that a company should purchase in order to minimize total inventory costs. This optimal order quantity strikes a balance between ordering costs (which include set-up costs) and holding costs.

By using the EOQ model, a company calculates the ideal number of units to order at one time, which can lead to reduced costs associated with overstocking or stockouts. The formula factors in demand rate, order costs, and holding costs to arrive at this optimal figure. Hence, the model's primary focus is on defining how many units should be ordered in each batch to maintain efficiency and control costs.

While set-up costs, holding costs, and overall annual expenses are important in analyzing inventory and financial management, they are components that the EOQ formula helps to balance rather than outcomes that it directly determines. This is why the identification of the optimal number of units per order is the key takeaway from the EOQ model.