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Dear all,this is the question from ACCA examiners’ report Jun’08
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 2,000 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 $2,000
B $2,500
C $3,000
D $4,000The Correct Answer is C and the working is as below:-
{[Buffer inventory + (EOQ ÷ 2)] × Annual holding cost per component} which gives
{[500 + (2,000 ÷ 2)] × 2} = 3,000.Why 2000 have to divide 2?? Plz answer TQ
yes the answer is correct and its really easy.
the formula for calculating total annual cost of holding inventory = average inventory x holding cost per unit per annumaverage inventory = (reorder quantity÷2) + buffer stock
and it says that comapany orders at eoq so thats the reason its divided by 2
When deriving the economic order quantity (EOD), there is an assumption that was used, namely that the average inventory is always half of the reorder quantity
(see : https://en.wikipedia.org/wiki/Economic_order_quantity#The_Total_Cost_function_and_derivation_of_EOQ_formula )Hence, the reason why we need to divide by 2 to get average inventory quantity.
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