Why might the EOQ model be better-suited to purchased parts than to internally manufactured products?

Purchased parts are items that a company buys from external suppliers, while internally manufactured products are those the company produces in-house. Purchased parts usually have a fixed cost per unit and a different lead time than internally manufactured products. On the other hand, internally manufactured products have variable production costs such as labor and overhead costs, in addition to the cost of raw materials.

The EOQ formula is given by: EOQ = \sqrt{\dfrac{2DS}{H}} where: D = annual demand S = ordering/setup cost per order H = holding cost per unit per year

The EOQ model can be easily applied to purchased parts because they have fixed costs per unit and are less influenced by factors such as production time, capacity constraints, and labor requirements. These factors enable a more straightforward application of the EOQ formula, and the model can determine the optimal order size to minimize inventory costs.

The EOQ model may not be well-suited to internally manufactured products for the following reasons: 1. Changing production costs: As manufacturing costs vary, the EOQ model may fail to capture variations in the costs of labor, overhead, and raw materials. 2. Production capacity and constraints: The EOQ model assumes an unlimited production capacity, which may not be true in the case of internally manufactured products. Capacity constraints can impact the optimal order quantity, making the EOQ model less accurate in such cases. 3. Variable lead time: The lead time for internally manufactured products may be highly variable due to production schedules, labor availability, and other factors. Since the EOQ model relies on a consistent lead time, its applicability is limited for internally manufactured products. In conclusion, the EOQ model might be better-suited for purchased parts rather than internally manufactured products because of the fixed costs and lead times associated with purchased parts, which make the application of the EOQ formula more straightforward. In contrast, internally manufactured products have variable costs, capacity constraints, and lead times that can impact their inventory costs and limit the accuracy of the EOQ model.