Unless there are quantity discounts, the purchase cost is not relevant to the decision. As far as calculating the total inventory cost is concerned, the question will make it clear whether or not the total purchase cost is to be included.

While I understand that the EOQ will be lower if the cost of ordering a new batch of material falls, can you please explain why the annual holding cost is lower also?

If the EQO is lower, then the average inventory will be lower (it is always half the order quantity) and therefore the annual holding cost will be lower.

Sir, why is it everytime when we calculate Inventory holding we take the average of Inventory. Like suppose if my annual demand is 10,000 and I am planning to purchase by 1000 units. So when I calculate my holding cost why should I take the average of 1000units??? Instead why can’t I just take 1000 units? Thankyou.

is it because the inventory is at either 500 or zero that means there is only 2 steps so 500/2 is 250. if not is there an additional lecture i can watch to understand more

No. As I wrote in my previous reply, if they order 1,000 units each time then the inventory level keeps moving between 1,000 and zero. So the average inventory through the year is 1000/2 = 500 units.

Thank you for your reply. $25 is the purchase price and is it the cost per unit, then?

“Janis has demand for 40,000 desks p.a. and the purchase price of each desk is $25. There are ordering costs of $20 for each order placed. Inventory holding costs amount to 10% p.a. of inventory value.”

odung says

I have not understood holding costs calculation. Actually how do we get the answer in the open tuition example video clip?

John Moffat says

It is 10% of the cost per unit (as stated in the question) multiplied by the average inventory.

Have you downloaded the free lecture notes that go with the lectures?

hammadmarfani says

Do we have to ignore the purchase cost in our exam answer too when it asks to calculate total inventory cost? Refered to example 2 of lecture notes.

John Moffat says

Unless there are quantity discounts, the purchase cost is not relevant to the decision. As far as calculating the total inventory cost is concerned, the question will make it clear whether or not the total purchase cost is to be included.

ameliaduncan92 says

While I understand that the EOQ will be lower if the cost of ordering a new batch of material falls, can you please explain why the annual holding cost is lower also?

John Moffat says

If the EQO is lower, then the average inventory will be lower (it is always half the order quantity) and therefore the annual holding cost will be lower.

aminushehu says

hi John,

I was wondering if we’ll be provided with these formulas in the exam

John Moffat says

The formulae sheet that you are given in the exam is printed at the beginning of our free lecture notes.

glaserrose says

extravagent lecture (y)

onezackk says

Sir, why is it everytime when we calculate Inventory holding we take the average of Inventory. Like suppose if my annual demand is 10,000 and I am planning to purchase by 1000 units.

So when I calculate my holding cost why should I take the average of 1000units??? Instead why can’t I just take 1000 units?

Thankyou.

John Moffat says

Because the level of inventory keep fluctuating between 1,000 (when you have just received a delivery) and 0 (just before the next delivery arrives).

caroline22 says

is it because the inventory is at either 500 or zero that means there is only 2 steps so 500/2 is 250. if not is there an additional lecture i can watch to understand more

John Moffat says

No. As I wrote in my previous reply, if they order 1,000 units each time then the inventory level keeps moving between 1,000 and zero. So the average inventory through the year is 1000/2 = 500 units.

This is explained in the lecture.

marken says

Is there a video explaining these please? Thanks

marken says

FIFO, LIFO, and Weighted average

John Moffat says

This is the new chapter I referred to in my other reply.

Lectures will be uploaded in early January 馃檪

marken says

I think these videos are for chapter 6 right? and not chapter 5 as per your notes

John Moffat says

Sorry – what has happened is that the notes have been updated with a new chapter.

That has made the numbers of the lectures wrong.

New lectures will be uploaded in early January (although the existing ones are all still fine).

marken says

Ok Mr.Moffat thanks for your reply. I will do just the notes for now and when the lectures are updated I will go through them again.

Thanks a lot

John Moffat says

You are welcome 馃檪

nightskyastar says

Sir, in example 1, could I ask why the cost per unit is $25? (when calculating stockholding cost) How could I calculate $25?

John Moffat says

The question says that the cost is $25 !!!!

(Have you not downloaded the free lecture notes? There is no point at all in watching the lectures if you have not downloaded the notes.)

nightskyastar says

Thank you for your reply. $25 is the purchase price and is it the cost per unit, then?

“Janis has demand for 40,000 desks p.a. and the purchase price of each desk is $25. There are

ordering costs of $20 for each order placed. Inventory holding costs amount to 10% p.a. of

inventory value.”

John Moffat says

Yes – the cost of the units is the price that they pay for the units.