Future Business Leaders of America (FBLA) Business Management Practice Test

What is the term for the quantity at which ordering costs equal holding costs?

1. Safety stock

2. Economic order quantity

3. Physical inventory

4. Fixed order quantity

The correct answer is: Economic order quantity

The term that describes the quantity at which ordering costs equal holding costs is known as the economic order quantity (EOQ). This concept is fundamental in inventory management and helps businesses determine the optimal order size that minimizes total inventory costs. The EOQ model provides a balance between the costs associated with ordering inventory—such as shipping fees and handling—and the costs of holding inventory, which include storage, insurance, and opportunity costs. By calculating the EOQ, companies can identify the most cost-effective quantity of inventory to order, thereby reducing waste and enhancing cash flow. This balance is crucial for businesses as it aids in maintaining sufficient stock levels without incurring excessive costs. The other terms presented do not represent this specific balance of costs in inventory management. Safety stock refers to additional inventory held to prevent stockouts, physical inventory involves the counting of all items in stock, and fixed order quantity pertains to a set amount of inventory that is regularly ordered, rather than focusing on the balance of ordering and holding costs.