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Risvy says

A company uses components at the rate of 500 units per month,which are bought in at a cost of $1.20 each from supplier.It costs $20 each time to place an order,regardless of the quantity ordered.The total holding cost is 20% per annum of the value of inventory held.

The company should order ……….. components

The total annual cost will be???? Can plz give the answer,Sir??

John Moffat says

The annual demand – D = 6000 (12 x 500)

The reorder cost – Co = 20

The holding cost – Cd = $0.24 (20% x $1.20)

If you put them in the formula you will get the EBQ, and then you can calculate the total costs.

Risvy says

Thank u Sir..

John Moffat says

You are welcome

Sagar Mehta says

When calculating Total Holding Costs i.e = Average Inventory X Holding Cost/Unit

400 X $2.5

Answer comes to $900, so why do we round it up to $1000 ?

John Moffat says

Try using a calculator

400 x 2.5 = 1000 (I did it in my head, but do check me )

Sagar Mehta says

lol. my bad

usama says

A company orders a particular raw material in order quantities of 250 units. No safety inventory is held, the inventory

holding cost is $3 per unit per annum and the annual demand is 2,500 units.

What is the total annual inventory holding cost of the material?

how could i attempt this question?

John Moffat says

If they order 250 each time, then the average inventory will be 250/2 = 125 units throughout the year.

The cost per unit is $3 per year, so the total cost will be 3 x 125 = $375

anyundo says

Why is it that when calculating the holding cost, the order quantity is divided by 2 before multiplying it with the odering cost per unit for the period?

John Moffat says

Because the level of inventory keeps fluctuating between the order quantity (immediately an order is received) and zero (just before the next order is received).

So on average it will be (order quantity) / 2 throughout the year.

Emil says

Can you explain me this question, please?

http://i58.tinypic.com/rlhrx2.jpg

John Moffat says

If you look at the formula, then you will see that the order cost is on the top of the formula.

So if the order cost is lower then the EBQ will be lower as well.

If the EBQ is lower, then the average inventory will be lower and therefore the cost over a year of holding inventory will be lower.

If you are still unsure, make up some numbers – calculate the EBQ and the holding cost. Then do it again with a lower order cost and see what happens.

(Please ask questions like this on the F2 Ask ACCA Tutor forum – this page is for comments/questions about the actual lecture)

henry says

A company uses 5000 units of a component per anum. ordering cost is $36. holding cost of one unit of component is $4 What is the e.o.q for that component, assuming 52 weeks year, what is the average frequency at which purchase orders should be placed? plz help me on this question

John Moffat says

I am not sure why you have a problem with the EOQ – you simply stick the figures in the formula.

D = 5,000; Co = 36; and Ch = 4. So the EOQ is 300 units.

As far as the frequency of orders is concerned, since they use 5000 units a year and order 300 each time, it means that they place 5000/300 = 16.67 orders a year. With 52 weeks in a year, this means that they place an order every 52/16.67 = 3.12 weeks on average.

henry says

thanks john

John Moffat says

You are welcome

changdae says

could i download lecture video?? cause my dorm’s internet speed is really bad, so that can’t played.

but i can download it while i’m sleeping and watch it later. ???

John Moffat says

Sorry -the lectures cannot be downloaded.

It is the only way that we can keep this website free of charge.

rutikanga says

hey,possible to see the person delivering lectures? otherwise,its sweet.

John Moffat says

In some lectures, yes – in others, no

Jim says

Why is the purchase cost of the inventory not included in the workings?

John Moffat says

Because we are calculating the costs per year, and over the year the total number of units purchased (and therefore the total cost) does not change. It is only the inventory costs that will change depending on the number ordered each time.

The only time we need consider the purchase costs is if the supplier offers a discount for purchasing a large quantity each time, and this is dealt with in a later example.

Jim says

Ok, thanks.

kimlien says

Thanks a lot, OT!