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Martynas says

Hi. First of all thanks a million for these free videos.

I have question regarding option a. If you order 500 units and they charge you 10% p.a of inventory value in a day-to-day basis. So you pay 625$. I understand that after you sell those units, you will order another “batch” of 500 units. So shouldn’t 625$ be charged again and again (for 80 times) by the storehouse?

johnmoffat says

Because it is being charged on a day-to-day basis, some days you will be charged on a full 500 units and some days on zero units (because the inventory level keeps going between 500 (when you receive an order) and 0 (just before you receive the next order). So it is as though on average you are being charged on 250 units for the whole year.

Eddie says

Thank you for presenting the lectures. I have a question about the calculations of inventory cost in example 1 part 2 where the order quantities are 750 units. When calculating the reorder cost, it seems not quite realistic to use 53.33 times 20 because the real number or orders should be 54. It is true to use 53.33 if the system is in long run, but here it is just for one-year base. And in terms of the calculations of holding costs, the average inventory level for the last “period” should be 250/2=125. Therefore, I think the calculations for the reorder cost should be 54*20=1080, the inventory cost should be ((750/2)*(53/54)+(250/2)*(1/54))*2.5=926 assuming that the interval between each replenishment is the same, or(((750*3/2)/3)*(159/160)+(250/2)*(1/160))*2.5=933.6 assuming that the items are sold at the same rate.

Could you please correct my faults in this. Thank you

johnmoffat says

Why do you say it is just for one year?

The question says there is a demand of 40,000 desks per year – this implies every year.

As I explain in the lecture, some years there will be 54 orders and some years only 53 orders. However there will be 53.33 orders a year on average.

We always make this assumption (and it is important in the exam not to round it).

Without this assumption, the EOQ formula itself is not valid.

Eddie says

oic, but if it is specifically for one year, am I right in the calculations?

johnmoffat says

Yes, but it will never ever be for just one year in the exam.

Dipty says

Hi. For holding cost, why do we always have to divide the total number of units by 2? I missed that bit. Thanks

johnmoffat says

Because the level of inventory keeps moving between the order quantity (when an order has just been received) and zero (just before the next order is received).

So the average inventory throughout the year is the order quantity / 2.

Dipty says

Sorry I still cant understand this. Do u mean because there are 2 choices? that is why it is divided by 2? :s

johnmoffat says

No – there are not two choices.

Suppose that the order quantity is 500 each time. You get a deliver of 500, so you have 500 in your warehouse. You sell these 500 over a few weeks/months, and the level of inventory in the warehouse falls to zero. Then you get a new delivery of 500 and the level goes back up to 500. This keeps repeating, so throughout the year the inventory level keeps moving between 500 and zero.

Therefore on average the level is (500 + 0)/2 = 250 units.

Have a look at the lecture again – I draw a little graph to illustrate how the inventory level keeps changing and therefore why the average inventory is the order quantity divided by two.

kimrong says

Hi John

I have a problem with a phrase:

Overtime is paid at a rate of time and a quarter.

what does it mean? if the workers are paid $4 per hour.

and total overtime 26 hrs, which is 8 hrs for specific order and the rest is general order.

question asking to compute the direct cost of specific overtime.

May u help about it?

johnmoffat says

Please do not ask a question about labour under a lecture on inventory control! Ask in the F2 Ask the Tutor Forum.

‘Time and a quarter’ means that for every hour they work they are paid for 1.25 hours.

So…..if overtime is 26 hours they will be paid 26 x 1.25 x $4 for the overtime.

Direct cost of labour is basic pay, plus overtime premium on specific job. (Rest is indirect cost)

magdeline says

Thanks, u completly solved my problem.very easy o understand as compered to text books recommended.

sisnem says

Same here,I MISS THE LECTURES

johnmoffat says

The lecture is working find, the problem must be at your end.

Have you looked at the support page (the link is above)?

houyam says

Hi,

am unable to see any of the lecture videos, even after refreshing many times and following the support instruction.

i didnt face these problems in last december revision time, did open tuition change anything in the format of the videos since last december?

johnmoffat says

Have you looked at the technical support page? The link to it is above.

houyam says

yes i did, but it didnt help, i’ve been trying to open the videos in the past few days and on different computers with different internet connexions but still, a blank page with ads comes up only.

simbamasara says

i have a problem with connectivity.When i play these lectures they would do fine upto around 5 mins and its starts to freeze in intervals of 2 then 5 upto 20 seconds at times and would deteriorate until it does not play at all.what can i do to rectify this problem

johnmoffat says

Have you looked at the technical support page? The link is above.

jameela hinds says

How come the purchase cost is not included in the total cost?

johnmoffat says

You can include it, but only if asked for. It is not relevant for the decision because it is the same over the year regardless of how many are ordered each time.

However, the one time when it has to be considered is when there are quantity discounts (see the next lecture).

Grant says

Thank you for the opentuition initiative. Overall it is outstanding. I just have one comment regarding this section. The average assumption used is too simple. This number should either be given, or additional information provided to calculate it. eg: In the example, the 500 unit average is given as 250, by simply dividing 500 by 2. If stock levels are being ordered every 4.5 days, one would assume the average sales per day to be around 111. This would make the average stock level closer to 333 for the year (try it out with ta simple excel table). By over simplifying examples in the material, a problem could be created in the exam and time could be wasted by the students trying to get their heads around the disconnect.

johnmoffat says

I am sorry, but you are completely wrong!!!

If 500 units are ordered each time, then the inventory levels vary between 500 and zero and the average inventory is 250 units. The days between orders will be 365 / number of orders, and the number of orders will be the demand per year / the order quantity. It will not be a random 4.5 days!

The EOQ formula itself depends on the assumption that the average inventory level is the order quantity divided by 2 (try proving it yourself, even if though the proof is not in the syllabus).

We do not over simplify the examples and a problem cannot be created in the exam as a result. To say that time could be wasted by students trying to get their heads round the disconnect is quite simply rubbish – there is no disconnect.

Yousaf says

very useful….. thanks

saqibsheeraz says

Great Lecture …)

jawad says

(4000/1250*20=64

wile the tutor show 640

johnmoffat says

The demand is 40,000!!!

So it is 40000/1250*20 which is equal to $640!!

(I know that in a hurry I wrote 4000 instead of 40000, but it should have been obvious that it was meant to be 40000 for the same reason that it was 40000 for each of the other 4 calculations!)

Sandy says

Y cnt I play it on my galaxy note? ???

opentuition_team says

because your NOte does not support MP4 and it does not have flash player..