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27 October, 08:59

In a fixed-order-quantity system, when demand is uncertain, using economic order quantity (EOQ) based only on the average demand will result in a low probability of a stockout. True or False?

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  1. 27 October, 09:23
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    False

    Explanation:

    If the demand is uncertain, if you use average demand to calculate the economic order quantity (EOQ), you will have a high probability of a stock-out occurring.

    EOQ = √ (2DS / H)

    where:

    D = annual demand in units

    S = order cost per purchase order

    H = holding cost per unit, per year

    If D is uncertain, then the whole calculus will either be understated or overstated.
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