Open Question
A company had an ending inventory that was overstated by $5,000 due to a miscount during the year-end inventory count. The amounts reflected in the end of the period balance sheet are:
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5. Inventory
Inventory Errors
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According to the Economic Order Quantity (EOQ) model, what percentage of inventory is assumed to be lost to spoilage or damage?
A
Varies depending on the product
B
10%
C
5%
D
0%
Verified step by step guidance1
Understand the Economic Order Quantity (EOQ) model: The EOQ model is a formula used in inventory management to determine the optimal order quantity that minimizes total inventory costs, including ordering and holding costs.
Recognize the assumptions of the EOQ model: One key assumption of the EOQ model is that inventory is managed perfectly, meaning there is no loss due to spoilage, damage, or theft. This ensures that the model focuses solely on cost optimization.
Analyze the options provided: The question asks about the percentage of inventory assumed to be lost to spoilage or damage. The EOQ model assumes 0% loss, as it does not account for inventory wastage in its calculations.
Relate the assumption to real-world scenarios: While the EOQ model assumes 0% loss, in practice, businesses may experience spoilage or damage depending on the nature of the product. This is why inventory management systems often include additional considerations for such losses.
Conclude the reasoning: Based on the EOQ model's assumptions, the correct answer is 0%, as the model does not factor in spoilage or damage when calculating the optimal order quantity.
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