In a short essay, explain how carrying costs and ordering costs change with order size in EOQ (economic order quantity) analysis

What will be an ideal response?

Answer: Carrying costs, such as money tied up in inventory, taxes, and storage, tend to increase when order size increases. Larger orders means that more inventory is on-site at any given time, and more inventory results in higher costs associated with keeping that inventory around–carrying costs. At the same time, larger orders drive ordering costs (paperwork, processing costs) down because needing to order less frequently means that the activities associated with ordering are kept to a minimum. The two types of costs, carrying costs and ordering costs, therefore, tend to go in opposite directions as order size changes. Finding Q, the optimum order size, is typically accomplished by graphically locating the point at which the carrying costs curve and the ordering costs curve intersect.