Why don’t we consider the purchase price alongside the holding and reorder costs. I understand that until the year end we’re gonna have to pay for the yearly demand. But if our reorder quantity is lower, we can save money and earn short-term interest on them as well. Doesn’t that make holding less inventory a bit more advantageous?

The interest is the most likely stock-holding cost in the formula (and is the reason that the stock-holding cost is often given as a % of the purchase price).

Hi John, i would like to know about the holding cost. When you take for example (800/2), why 2 and where does this 2 come from or what does that figure means?

Hi, I need help on this question
A company has the following data;
Economic order quantity =21.9 metres
Minimum Level = 10
Maximum Level = 40
Average Level = 20.99 metres

Is the company doing well? Why would you say they’re doing well or not

I’m assuming they’re not doing well but I can’t back this up…What do you think??

Sorry for posting twice as I am new to this site I confused

Hello Mr John, wonderful lecture.
I came across this EOQ question in BBP revision kit where to find inventory holding cost, we have to find the minimum inventory level (because there is a reorder level) and add to average inventory ordered. I understand this part.
What I don’t understand is, shortly after we r asked to find EOQ using the same info in the question and then also to find the new inventory holding cost, however in finding the new holding cost they still added the same minimum inventory level to the average quantity ordered, even though the EOQ is smaller than the reorder level to start with. Please could you explain?

It’s a bit difficult to fit a full explanation in the limited space here. Best is to watch the F2 Revision lecture on this. It should make sense, but if not then as again (but in the F2 Ask the Tutor Forum)

Very well explained lecture 🙂 I am planning to sit F2 asap and F5 this june,
out of curiosity I wanted to ask, what is the equation that has to be differentiated to arrive at the formula? Would you mind telling me, I want to give it a go. A bit rusty in maths now but still my favourite subject 🙂

If Q is the order quantity (and the other symbols are as per the formula), then the total reorder cost over the year is D/Q x Co; and the total holding cost over the year is Q/2 x Ch.

So the total of the two, TC = (D/Q x Co) + (Q/2 x Ch).

To get the minimum total cost, we differentiate this with respect to Q and then make it equal to zero.

(I have answered because you want to give it a god, but do please appreciate that you can not possibly be expected to differentiate in any ACCA examinations)

great lecture, i must say. However i would like to ask why in some instances when we are calculating the total costs, we add the re-order cost+holding cost plus (purchase price *demand)
whereas you only added the total holding costs with the ordering costs when computing the total costs. Is my method wrong?

It really depends what is asked for in the question – the total costs or the total inventory costs. The question will make it clear.

Usually it is only the total inventory costs that we are bothered about because the total purchase cost will remain unchanged (except, of course, if there are discounts).

Hello Sir, I’m new to this website, forgive me if the question I pose is talked on in later lectures but I was wondering, how the EOQ will me modified for say international businesses? Or will it be stay the same? In the sense that, duty fees will we part of fixed costs per order.

Have you actually watched the lecture (because I go through examples of calculated the total cost in the lecture)?

The EOQ is 1,000, but it is certainly not $’s!!!!

To get the total cost you multiply the average inventory by Ch – this gives the total holding cost.
You multiply the number of orders by Co – this gives the total order cost.

Farid says

Hi John

Why don’t we consider the purchase price alongside the holding and reorder costs. I understand that until the year end we’re gonna have to pay for the yearly demand. But if our reorder quantity is lower, we can save money and earn short-term interest on them as well. Doesn’t that make holding less inventory a bit more advantageous?

Thanx in advance

John Moffat says

The interest is the most likely stock-holding cost in the formula (and is the reason that the stock-holding cost is often given as a % of the purchase price).

Farid says

yeah, that seems logical. Thanks for your response

John Moffat says

You are welcome 🙂

kirsley says

Hi John, i would like to know about the holding cost. When you take for example (800/2), why 2 and where does this 2 come from or what does that figure means?

kirsley says

HI again me.. I think its ok. i have reviewed once more. it should be the average inventory and therefore where the holding cost.. am i right?

John Moffat says

Yes – it is to get the average inventory.

SlLO says

Hi, I need help on this question

A company has the following data;

Economic order quantity =21.9 metres

Minimum Level = 10

Maximum Level = 40

Average Level = 20.99 metres

Is the company doing well? Why would you say they’re doing well or not

I’m assuming they’re not doing well but I can’t back this up…What do you think??

Sorry for posting twice as I am new to this site I confused

John Moffat says

The level of inventory is no indication as to whether the company is doing well or not!!

(And please ask questions like this in the Ask the Tutor Forum – not as a comment on a lecture)

abdulaziz says

I’ve always wondered, what is the use of the text books?!!!!! why they are making it so hard??

John Moffat says

I agree 🙂

Rhona says

Thank you for the lecture – EOQ formular is very well explained

John Moffat says

Thank you for the comment 🙂

Grace says

Hello Mr John, wonderful lecture.

I came across this EOQ question in BBP revision kit where to find inventory holding cost, we have to find the minimum inventory level (because there is a reorder level) and add to average inventory ordered. I understand this part.

What I don’t understand is, shortly after we r asked to find EOQ using the same info in the question and then also to find the new inventory holding cost, however in finding the new holding cost they still added the same minimum inventory level to the average quantity ordered, even though the EOQ is smaller than the reorder level to start with. Please could you explain?

John Moffat says

It’s a bit difficult to fit a full explanation in the limited space here. Best is to watch the F2 Revision lecture on this. It should make sense, but if not then as again (but in the F2 Ask the Tutor Forum)

shahz20 says

Very well explained lecture 🙂 I am planning to sit F2 asap and F5 this june,

out of curiosity I wanted to ask, what is the equation that has to be differentiated to arrive at the formula? Would you mind telling me, I want to give it a go. A bit rusty in maths now but still my favourite subject 🙂

John Moffat says

If Q is the order quantity (and the other symbols are as per the formula), then the total reorder cost over the year is D/Q x Co; and the total holding cost over the year is Q/2 x Ch.

So the total of the two, TC = (D/Q x Co) + (Q/2 x Ch).

To get the minimum total cost, we differentiate this with respect to Q and then make it equal to zero.

(I have answered because you want to give it a god, but do please appreciate that you can not possibly be expected to differentiate in any ACCA examinations)

David says

Very easily explained, thanks much!

Mariam says

costs as in the ordering and holding costs?or the fixed,variable etc costs?

John Moffat says

I am not sure what you mean. In the context of inventory control it is the cost of ordering and the cost of holding inventory that are relevant.

Mariam says

major costs associated with holding and ordering costs

John Moffat says

I answered this in my first answer to you (below), and I give examples in the lecture.

Mariam says

i have a question where it states how discounts can affect a certain EOQ calculation (say 2000 units) and subsequent stock costs.

do I have to work out an actual full question with discounts , comparing it to the EOQ

then explain ?

2) I would also like to know what the two major costs associated with

a) holding stock

b) ordering stock

John Moffat says

You will not get a full question because of the nature of the exam.

However you can be asked to calculate both with and without discounts.

With regard to costs there are not just two major costs, there are several. I take about the types of costs in the free lectures.

Mariam says

great lecture, i must say. However i would like to ask why in some instances when we are calculating the total costs, we add the re-order cost+holding cost plus (purchase price *demand)

whereas you only added the total holding costs with the ordering costs when computing the total costs. Is my method wrong?

John Moffat says

It really depends what is asked for in the question – the total costs or the total inventory costs. The question will make it clear.

Usually it is only the total inventory costs that we are bothered about because the total purchase cost will remain unchanged (except, of course, if there are discounts).

Mariam says

so its only when you’re asked for total costs or in a discount question that you compute the total purchase costs plus holding and ordering costs?

John Moffat says

That is correct 🙂

Mariam says

thanks! got it

John Moffat says

Great 🙂

Edgard says

Hello Sir, I’m new to this website, forgive me if the question I pose is talked on in later lectures but I was wondering, how the EOQ will me modified for say international businesses? Or will it be stay the same? In the sense that, duty fees will we part of fixed costs per order.

mariyam says

Sorry sir…and now i understand…thank you…

mariyam says

Using the formula I got $1000…then how to find total cost..

John Moffat says

Have you actually watched the lecture (because I go through examples of calculated the total cost in the lecture)?

The EOQ is 1,000, but it is certainly not $’s!!!!

To get the total cost you multiply the average inventory by Ch – this gives the total holding cost.

You multiply the number of orders by Co – this gives the total order cost.

mariyam says

Hi sir I don’t understand the answer of the first question…RISVY ‘s question…can you please help me..and what is Cd…

John Moffat says

Which bit did you not understand? Cd was a typing mistake, it should be Ch (which, as I wrote, is the holding cost).