Question

Which ONE of the following is NOT an assumption of the economic order quantity (EOQ) model?

• A. Demand is known and deterministic.
• B. Lead time is zero.
• C. Stockouts are permissible.
• D. Holding cost for the quantity in stock is linearly increasing with the order quantity.

Hint:

Think about what the classic EOQ sawtooth inventory diagram looks like and whether it ever allows stock to run negative.

Answer 1

The Correct Option is C

Step 1: Picture the EOQ Inventory Cycle:
In the standard EOQ model, stock level starts at $Q$ units right when an order arrives, falls steadily as items are consumed at a constant known rate, and hits exactly zero at the moment the next order arrives.
This picture, a repeating sawtooth pattern that always touches zero and immediately jumps back up, is only possible if three things hold: demand is constant and known, replenishment is essentially instant (zero lead time), and the stock level never goes below zero.

Step 2: Reading Off the Assumptions from the Picture:
Constant known demand gives the straight downward sloping line in the sawtooth, this matches option (A).
Instant replenishment gives the vertical jump back up to $Q$ with no waiting gap, this matches option (B).
Average stock over a cycle is $Q/2$, and since holding cost equals $(Q/2)C_h$, cost rises directly with $Q$, this matches option (D).

Step 3: The Missing Piece, Shortages:
The sawtooth diagram never dips below the zero line, that is the whole point of the basic model, it deliberately avoids stockouts by reordering just in time.
If stockouts were allowed, the diagram would need an extra segment below zero representing backorders, and that situation belongs to a different, more advanced model called EOQ with planned shortages, not the basic EOQ model.

Final Answer:
Since the basic EOQ sawtooth diagram never permits negative stock, "stockouts are permissible" is not one of its assumptions.
\[ \boxed{\text{Option (C) is NOT an assumption of the basic EOQ model}} \]