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    • Avatar of johnmoffat 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 johnmoffat 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)

  1. avatar 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

    • Avatar of johnmoffat 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.

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