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A manufacturing company uses 25,000 components at an even rate during a year . each order placed with the supplier of the components is for 2000 components which is the economic order quantity . the company holds a buffer inventory of 500 components . The annual cost of holding one component in inventory is $2
What is the total annual cost of holding inventory of the component?
A. 2000
B. 2500
C. 3000
D. 4000Sir in The opentution lectures of inventory
When calculating the annual holding cost relating to the EBQ
You simply
Took the
2722/2 x 0.9 = 1224.9 x 3 and got
$3675So in this question of the bpp
I did the same
But I’m not getting the answer ..By the way
Both questions are on EBQ …Please sir assist us
Ignoring for a moment the buffer inventory, the average inventory would be 2,000/2 = 1,000.
With a buffer of 500, the average inventory throughout the year becomes 1,500.At $2 holding cost per unit, the total annual holding cost is 1,500 x $2 = $3,000
How come
I’m the opentution lectures they did calculate the annual holding cost differently by using EBQ ….This was the difference( 1-D/R )
In your lectures you did like this
2722/2 x 0.9 = 1224.9 x $3 = 3675
So my confusion is
When the annual rate and annual demand is given as the question I sent you at first …
do we have to do an adjustment to calculate
The annual holding cost
Like this (1-D/R ) ???Coz in your lectures when the annual rate and annual demand is given you did the adjustments… in the study guide of Kaplan they did not ….
It’s confusing
I suggest that you watch the lectures again!!
The holding cost is only equal to 1-D/R when the company is producing its own goods. That is not the case here – they are purchasing them from a supplier in batches of 2,000 each time.
The annual production rate and annual demand are not given in the question you posted! The annual demand is 25,000 and they are buying them from a supplier in batches of 2,000 each time.
My apologies…
I accept I must read the question analyticallyAnd sir
If the annual production rate and annual demand are given we need to do according to the method which you did in the lectures isn’t it ?
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