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GATE 2023 ME – Question 13

Production Planning and Control · Inventory control: deterministic models, safety stock, control systems · 1 mark · Multiple choice

With reference to the Economic Order Quantity (EOQ) model, which one of the options given is correct?

four curves of cost per unit against order quantity. P1 is a U-shaped curve with a minimum, P2 is a straight line rising with order quantity, P3 is a curve that falls steeply and then flattens, and P4 is a horizontal line.
  1. Curve P1: Total cost, Curve P2: Holding cost, Curve P3: Setup cost, and Curve P4: Production cost.
  2. Curve P1: Holding cost, Curve P2: Setup cost, Curve P3: Production cost, and Curve P4: Total cost.
  3. Curve P1: Production cost, Curve P2: Holding cost, Curve P3: Total cost, and Curve P4: Setup cost.
  4. Curve P1: Total cost, Curve P2: Production cost, Curve P3: Holding cost, and Curve P4: Setup cost.

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Show answer and explanation

Correct answer: (A) Curve P1: Total cost, Curve P2: Holding cost, Curve P3: Setup cost, and Curve P4: Production cost.

Explanation

The holding cost per unit grows with the order quantity (the straight rising line, P2). The setup cost per unit falls as the order quantity grows, since it is spread over more units (the falling curve, P3). The production (purchase) cost per unit does not depend on the order quantity (the horizontal line, P4). The total cost is the sum of these and is the U-shaped curve with a minimum, P1, which is the EOQ.