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  1. avatar 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?

    • Avatar of 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.

    • Avatar of 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)

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