Bhimani, Horngren,
Datar and Rajan,
Management and Cost Accounting, 5
th
Edition, Instructor’s Manual
© Pearson Education Limited 2012 may have less effect on operating income than an improved shrinkage performance (where the grocer saves the entire cost of stock that formerly vanished. The advantages of the EOQ model are that it is very simple and it captures important trade-offs between ordering costs and carrying costs. However, the model is based on the simplifying assumption that the other three costs associated with goods for sale are irrelevant. This is valid if the purchase cost/unit is unaffected by the number of units ordered (e.g. there are no quantity discounts if quality is unaffected by the number purchased (e.g. perishability is not an important consideration and if no stockouts occur (e.g. the cost of stockouts is so high that management always maintains sufficient safety stock.
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