PHFO Quantitative Analysis For Business Pre-Assessment Practice Exam

The key idea is to balance two competing costs: how often you place orders and how much inventory you carry. The EOQ, or Economic Order Quantity, is the quantity that minimizes the total annual cost. The formula is EOQ = sqrt(2DS/H), where D is the annual demand, S is the fixed cost per order, and H is the annual holding cost per unit.

In the taxidermist scenario, the given numbers for D, S, and H combine so that this balance point falls near 24 gallons. Ordering about 24 gallons each time keeps the sum of ordering costs (which rise with more frequent orders) and holding costs (which rise with larger, longer-held inventories) at a minimum. That’s why 24 gallons is the best approximation for the EOQ here—the quantity that minimizes total cost under the provided data. Smaller orders would require many orders and drive up costs; larger orders would tie up more inventory and raise holding costs, making them less economical.