# stockholding costs

This topic contains 7 replies, has 4 voices, and was last updated by  ansi 4 years, 9 months ago.

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• ansi
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Hello everyone,

I fail to settle one problem and by some bad luck solution for this test is not provided in the text-book. So maybe anyone can work this out for me or at least explain it without calculations.

A company buys each item of inventory at a purchase price of \$30. The cost of capital is 9% p.a. The company pays rent of \$10,000 p.a. for the warehouse. Each item takes up 1,5 square metres in the warehouse which could be sublet at \$10 per square metre per annum. Admin costs assosiated with each order are \$0,50 per unit. In addtion the company pays \$15,000 p.a. salary to storeman.
What is the correct value of h in the EOQ formula?

A. \$27.70
B. \$28.20
C \$32.70
D. \$33.20

Ansi

eddie247
Participant
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hi there
i assume u know what the eoq formula is….in this question,u r being asked
for the value of h which i believe is the cost of handling….a mathematical
approach to this sort of question would be one way of solving the problem,
that’s my opinion,maybe others have a different way of going on about it
so that means that u would have to start off by determing what the eoq is in
the first place,wouldn’t u?once u have done that task,then it’s just a matter
of solving for the unknown,which is the cost of handling,which is h and then
that would lead to some joy i believe,i haven’t tried it,but that is the way
i would do it

ansi
Moderator
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It gave me some ideas …
I solved that task , though i’m not sure about whether it’s correct or not.

1. If a rent of the whole warehouse per annum is \$10 000. And the cost of storing each item inside it is equal \$10. Then by deviding those figures we can find the order quanity: 10 000 / 10 = 1 000 units.

2. Now to find total stockholding costs we need to calculate all the costs that are related to storing of items , those are :
9%*30*1000 (cost of capital tied up) + 10 000 (cost of renting a warehouse) + 15 000 = 2 700 + 25 000 = \$27 700
To find Ch or stockholding costs per unit we need to devide those by the amount of units = 27 700 / 1 000 = \$27.70.

Administrative costs are reordering costs so they are not included in the formula for stockholding costs , as for salary to storeman ..i believe those should be included to stockholding costs, so i included them.

So the correct answer to this test is A .
However , i will repeat that it’s just my calculation. If anyone see that it’s wrong and know how to correct it , please do

chesley
Participant
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there is problem in this question, guess we better ask tutor or book publisher to explain it, i also spend lot of time for this question,i guess admin cost is ordering cost and we have no way of finding annual demand,We dont have average inventory,only valueble infornation is 9% Intrest of capital.cost of storage is available but qty of items not mentiond,

John Moffat
Keymaster
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H is the formula is the variable cost of holding one unit of average inventory for one year.

So……the storemans salary is not relevant because it will be the same for the year whatever quantity we order (and whatever average inventory).

The cost of money is relevant – the cost of holding one unit for a year is 9% x 30 = 2.70.

The warehouse space is relevant, but here there is a trick.

To have 1 unit of average inventory would mean maximum inventory of 2 units (the average is half way between the maximum inventory and zero inventory). This means that we have to keep 2 units of space free (i.e. 2 x 1.5 = 3 sq metres). So we lose the rent on those 3 sg metres at \$10 = \$30.

The admin costs of ordering are not relevant – they are not costs of holding inventory.

So the total for h is \$2.70 + \$30 = \$32.70

ansi
Moderator
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Thank you very much John!

I would never came to that solution myself.

Hm, if this is F2 level then it could be better to have more tasks of this kind to practice..

eddie247
Participant
• Topics: 6
• Replies: 14

hi ansi,r u on bpp,kaplan,ot notes or all of them,because i have not come
across this question in the bpp txt that i use……anyway it does not matter
but i agree with chelsey,the question had more irrelevant info than relevant
ones like what john pointed out,admin costs were irrelevant,so was the salary
to the storeman,but if i was doing this in an exam,then it would be a straight
guess for me no doubt,after all we have quite more stuff to cover in the
syllabus…but if this question has appeared before in the past then it is
worth taking some time to really understand how it is done

ansi
Moderator
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hey eddie,

this question is from kaplan textbook. And yea i also haven’t seen anything similar in bpp.
Of course we can work out this question , i guess we already did… And thanks to OT that at least here i got a solution for it. …
It’s strange that it’s just missing in kaplan answers ….

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