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hello sir
hope you are doing wellSir for this question I don’t understand why they are adding 10% of 480 in Cost of holding per unit. isn’t it only holding cost? whats the relation to cost of capital
QUESTION :
The production manager has established the following information about a major
inventory item.
Purchase price per unit $480
Annual demand 4,000
Supplier’s delivery costs per order $10
Chief buyer’s salary per annum $30,000
Total number of orders placed per annum* 1,000
Annual storage costs per unit $2
Cost of capital 10% per annum
*Relates to all product lines, not just this one.
What is the economic order quantity for this inventory item?ANSWER
40 UNITSCo = $10; D = 4,000; Ch = $2 + 10% of $480 = $50
EOQ = ?(2 × Co × D ÷ Ch) = ?(2 × 10 × 4,000 ÷ 50) = 40 units
The alternative answers come from either ignoring the cost of capital tied up in
inventory or including the irrelevant chief buyer’s salary (or both).I do not understand what you mean about ‘alternative answers’, because the correct answer is indeed 40 units and the working you give are correct and give 40 units.
The chief buyers salary is irrelevant because it is fixed over the year and will not vary with the order quantity.
The cost of capital is relevant, which is why the holding cost per unit per year is $2 + (10% x $480) = $50.
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