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KHAMA says

Mr. Moffat,

For example #4 i am having trouble finding just how you derived at 2722 units i keep getting 2449

John Moffat says

The answer is definitely 2,722, and I do show the workings in the lecture. I can only think that maybe you are using your calculator wrongly.

Maciej says

26:32 there’s a mistake. It should be 50 000 over 500 000. Am I correct?

John Moffat says

You are correct – I missed off a zero – but the calculation is done correctly (which is what matters )

Samuel says

Thank you very much.wish I could do more than just type “thank you”

John Moffat says

You are welcome

rashad says

Dear John,

First of all, thank you for your efforts putting so much on the spread of free education. The way you explain things and your intonation help me to memorize them much easier later on. Yet the content you deliver us may be polished in terms of visualtion. I would appreciate if you choose the combination of different colours (such as green background and white chalk) while writing on the board. In the future, you may also consider preparing formulas, graphs, pie charts and all other visuals beforehand by the help of more sophisticated tools. And I’m sure there would be many of us willing to appreciate your hard work and donate to support the oppotyunity cost of preparing those esthetics.

Thanks!

John Moffat says

Thank you for your comment.

However we do not use blackboards and chalk!!!

With regard to more sophisticated tools, please appreciate that we provide all of this free of charge – we prefer to use our limited resources in increasing and improving on what we offer on this website. We consider the content to be the most important.

Thank you for offering to donate, but we do not accept donations and we will never charge for anything we offer.

Sam says

I’m so grateful that I have found this lecture. It’s really nice,sir.

How exciting !

mariam says

thanks am xo greatful

John Moffat says

You are welcome

mariam says

hey pls help me out wit dis ques…..A company produces 50000 units per annum has decided to use nails which cost $10 each to purchase,the odering cost is 1.25% of purchase price per month the company has decided that the manufacture of the nails will be in house,The necessary machines has been purchased which has a capacity of 250,000 nails per annum,,,,calculate the EBQ

John Moffat says

In future please ask this sort of question in the Ask the Tutor Forum – not as a comment on a lecture.

You need to use the EBQ formula on the formula sheet.

D = 50,000; Ch = 1.25% x 10 = $0.125; R = 250,000.

You have not typed the whole question but Co is the set-up cost each time a batch is produced.

Alexis says

D/R = 50,000/500,000 not 50,000/50,000.

Alexis says

50,000/50,000 gives you 1. 50,000/500,000 gives you 0.1.

(1 – 0.1= 0.9)

(1 – 1 = 0)

1,361 x 0.9 = 1,224.9

1,224.9 x $3 = $3,675.

Hence, we should be worried about the zeros because we can result in the wrong answer.

John Moffat says

Of course they give different answers!!! I am not stupid!

However I got the correct answer even if I missed writing one zero in my workings. In the exam nobody looks at you workings – only the answer (because a computer marks it!)

John Moffat says

Yes – and that is exactly what I wrote down.

I don’t understand why you have written this!

Haseeb says

On that point, how many steps are we required to do? I mean in that square root equation, do we need to solve bracket first and than write that bit and than all multiplications and than write that bit and than take off the square root. Should we need to do that much writing or we can just calculate and write down the answers.

John Moffat says

These questions will be multiple choice and so all that is marked is the answer that you choose from the choices available.

How you do your own workings does not matter – your workings will not even be looked at.

Haseeb says

Thank you very much John for your reply.

John Moffat says

You are very welcome

Emily says

I have trouble with a seemingly basic theory question. It goes like this:

What is the economic batch quantity used to establish?

Optimal:

1. Reorder quantity

2. Recorder level

3. Order quantity

4. Inventory level for production

The answer is no. 3 and I don’t understand what’s the difference between reorder quantity and order quantity?

John Moffat says

I don’t know where you found the question, but it is rather unfair – reorder quantity and order quantity really do mean the same thing.

Emily says

It was from the BPP revision kit and got me really worried. Thought they meant the same thing too!

nazpad says

I just watched the lecture on Economic Batch Quantity example 4 and i don’t understand how you calculated the holding cost as i get a different answer i keep getting $1361. Please explain in detail how you got that answer.

John Moffat says

I assume that you are happy arriving at the EBQ as 2,722.

This means that the average inventory (using the formula immediately above the example in the course notes) is 2722/2 x 3(1 – 50000/500000)

Which is 1361 x 3 x 0.9 = 3675.

Did you check the answer at the back of the Course Notes?

Munazza says

I Love the lecture..

John Moffat says

Thanks

kutiez2005 says

I don’t have this section in the notes I downloaded, they jump from EOQ with discounts to the JIT system?

John Moffat says

It is on page 27 of the Paper F2 course notes.

(If you are taking F9, the the economic batch quantity is not examinable in F9)

utkurjon says

Hi ACCA Tutors

I would like to thank you and open tuition for all your help in my studies of ACCA. Your notes, videos & help makes it easy to study.

I watched the video of example 4 where workings under square root of 2x50000x200 over 3×0.9 = 2722 units (order quantity) however when I checked it my calculator gives the following answer 2449 units.

Could you please tell me how you got 2722 units?

Thanks.

John Moffat says

I don’t know what you are doing wrong, but the answer is definitely correct at 2722.

tamara says

I was calculating it incorrectly too. the correct calculation is..

2x50000x200= 20,000,000 and 3×0.9= 2.7

so 20,000,000 over 2.7=7,407,407,407 then find square root which equals to 2721.6

rounded off to the nearest whole number gives you 2722

Hope this helps

David says

Tamara hit the nail on the head with how to calculate that particular example.

elle says

QUESTION

A company is able to manufacture its own components for inventory at the rate of 4,000 units a week. Demand for the company is at the rate of 2,000 units a week. Set up costs for each production run is $ 50. The cost of holding one unit of inventory is $ 0.001 a week.

Required

Calculate the economic production run .

ANSWER

Q = ?((2 ???? 50 ???? 2,000)/0.001(1?2,000/4,000) ) = 20,000 units (giving an inventory cycle of 10 weeks)

MY QUESTION

What makes the production run “economic”? How is it ‘economical’ at 10 weeks and not 9 weeks for example? Please use a TABULAR form to explain.

For example

WEEK 1 WEEK 2 WEEK 3 WEEK 4 WEEK 5 WEEK 6 WEEK 7 WEEK 8 WEEK 9 WEEK 10

OPEN INV 0 2000 4000 6000 8000 10000 12000 14000 16000 18000

ORDER ?

DEMAND -2000 -2000 -2000 -2000 -2000 -2000 -2000 -2000 -2000 -2000

PRODN RATE 4000 4000 4000 4000 4000 4000 4000 4000 4000 4000

CLOS INV 2000 4000 6000 8000 10000 12000 14000 16000 18000 20000

HOLD COST ?

ORDERING COST?

I do not understand how (My Question 1) Holding cost and Ordering cost fit in this table and why ( My Question 2) the Q = 20 000 units and is a 10 week cycle and not a 5 week cycle for example. Why is 10 weeks used? Please explain

John Moffat says

Your table is wrong in that they will not be producing 4,000 units a week – that would be ridiculous since they are only selling 2,000 a week.

The question says that they are able to manufacture 4,000 a week – not that they do manufacture 4,000 a week. That is simply telling you how fast they are capable of producing (and therefore how long it will take for them to make the 2,000 that are ordered each time).

Assuming 52 weeks in a year:

The total order cost per year will always be the number of orders x set-up cost each time.

This is: (Demand per year)/(order quantity) x (cost each time)

At an order quantity of 20,000, this comes to ((52 x 2,000) / 20,000 ) x $50 = $260 per year

The total holding cost per year will always be average inventory x cost of holding 1 unit for 1 year

This is: ((order quantity) / 2) x (1 – Demand/Production rate) x holding cost per unit per year

At an order quantity of 20,000, this comes to (20,000 / 2) x (1 – 2,000/4,000) x (52 x 0.001) = $260 per year

So the total cost per year is $260 + $260 = $520 per annum

Try any other order quantity you like and the total cost will be great than $520 – that is why 20,000 is the economic batch quantity (i.e. the cheapest total cost per year).

Since best is to order 20,000 each time and they are selling 2,000 each week, it means that they will be placing an order every 10 weeks. (If they placed an order every 5 weeks then they would be ordering far more than they were selling which would be stupid – in total they are only selling 2,000 every week (i.e. 104,000 a year) and so they will only be ordering 104,000 a year in total.

I have no intention of producing a table – I told you before that it cannot be asked for and is wasting time.

If you want to then fine. On Day 1, an order will be placed for 20,000 units. It will take 5 weeks for all 20,000 to arrive (because the rate of production is 4,000 a week). During those 5 weeks, they will have sold 10,000 units (because they sell 2,000 a week and they are continuing to sell while the order is being delivered). So the maximum inventory level is 20,000 – 10,000 = 10,000. After a further 5 weeks the inventory will have fallen to zero (again because they are selling 2,000 a week). Then a new order is placed and the cycle repeats itself.

So…..the level of inventory is fluctuating between 10000 (maximum) and 0 (minimum) and is therefore on average 5,000 units throughout the year. At $0.001 per unit per week, this means that the holding cost over the year is 5,000 x 52 x $0.001 = $260 per year (as above).

Since the total demand is 52 x 2,000 = 104,000 per year, and since they are ordering 20,000 each time, they will place 104,000 / 20,000 = 5.2 orders a year and so the total set-up cost is 5.2 x $50 per year = $260 per year (as above).

( Before you ask (although this is also dealt with in my lecture), they will actually place 6 order in the first year, but have inventory remaining and so only need 5 orders the second year, and so on. We always assume it to be a long-term policy and therefore on average there will be 5.2 orders a year.)

elle says

Thank you so much. The 4000 being able to manufacture, but doesn’t manufacture, answers my questions. Only thing though, the reason I’ve asked for a table is because I’m trying to understand the logic of the EQB formula. If you didn’t have the formula, how would you calculate (get to) 20 000 being the economic order qty? Sorry if this is a stupid question, but I’m obviously missing something somewhere.

John Moffat says

In the exam, you will have the formula

However, the only other way you could do it (apart from deriving the formula – but that involves differentiating which is not in the syllabus for any ACCA exams), would be to calculate the total cost per year for several different order quantities. (In exactly the same way as in my previous answer – doing it (for example) for order quantities of 5,000, 10,000, 15,000, 20,000, 25000, etc.). Then you could plot them on a graph – total cost on the vertical axis and order quantity on the horizontal axis. You would find that you got a curve and you could then read off from the graph the order quantity that gave minimum total cost.

But…..you cannot be asked to do this in the exam. You will be given the formula.

elle says

I was hoping you would say that lol Thank you so much. It was in one of the EOQ tables where I couldn’t understand where the different Order quantities had suddenly come from / have been calculated that confused me which you have now cleared up. I also understand the EQB better now. Thank you so much.

John Moffat says

You are welcome

elle says

A last question on EBQ please – if the rate of production is 50 units a day and the order quantity is a 100. Is the production run 50 or 100? I’m assuming the ‘inventory cycle’ would be the qty ordered?

John Moffat says

The production run is 100 units. Every time an order is placed for 100 units, a production run takes place and that many will be produced (and at the rate of 50 a day, it will take 2 days to produce them).

The inventory cycle depends on how many they are selling per day. For example, if they order 100 each time and they are selling 10 units a day, then the inventory cycle is 100/10 = 10 days. (They will place an order every 10 days)