The inventory keeps fluctuating between the EOQ and zero – see the graph on the screen. Therefore the average inventory through the year is half way between the two.

In determining the average inventory for the handling cost, I thought that you would’ve divided the inventory units per each order by the number of times ordered per year. Why do you divide by 2 instead in every scenario for the average?

Suppose, for example, you are ordering 100 units each time. You then start with 100 units in inventory. When the level falls to zero you then receive another 100, and so on throughout the year. So the level of inventory keeps going between 100 units and zero. On average there are therefore 50 units throughout the year.

If you are still unsure, watch the relevant Paper F2 lectures (because this is revision from F2).

Can we “assume” that the examiners of the ACCA will choose “nice numbers”? Meaning in this example we have seen that all units gave irregular numbers. Where as the optimal EOQ came to exactly 2’000,-

Meaning if my final answer to a question is 1234,9876 “maybe” there is something wrong in my calculation?

Great lecture Sir, so the purchase price would have been relevant if it varied with order quantities?.e.g for 500 =$25;750 units =$20;1000 =$15….,so we would have had to include the purchase price as part of the total costs? Or its irrelevant regardless?

zahidk193 says

Can I ask why we divide by 2 get the average holding cost

John Moffat says

The inventory keeps fluctuating between the EOQ and zero – see the graph on the screen. Therefore the average inventory through the year is half way between the two.

akilahaa says

In determining the average inventory for the handling cost, I thought that you would’ve divided the inventory units per each order by the number of times ordered per year. Why do you divide by 2 instead in every scenario for the average?

John Moffat says

Suppose, for example, you are ordering 100 units each time. You then start with 100 units in inventory. When the level falls to zero you then receive another 100, and so on throughout the year. So the level of inventory keeps going between 100 units and zero. On average there are therefore 50 units throughout the year.

If you are still unsure, watch the relevant Paper F2 lectures (because this is revision from F2).

theodoor says

Can we “assume” that the examiners of the ACCA will choose “nice numbers”? Meaning in this example we have seen that all units gave irregular numbers.

Where as the optimal EOQ came to exactly 2’000,-

Meaning if my final answer to a question is 1234,9876 “maybe” there is something wrong in my calculation?

John Moffat says

No – they won’t always be ‘nice’ numbers 🙂

theodoor says

Thank you sir,

Good to know.

John Moffat says

You are welcome 🙂

nakhoa says

Great lecture Sir, so the purchase price would have been relevant if it varied with order quantities?.e.g for 500 =$25;750 units =$20;1000 =$15….,so we would have had to include the purchase price as part of the total costs? Or its irrelevant regardless?

nakhoa says

I think the quantity discounts lecture addressed my question and therefore ,you can ignore .

John Moffat says

Yes – it does address your question 🙂

usamaamjad17 says

Your lectures are awesome, I wish you had lectures for resits as well.

John Moffat says

Thank you for your comment 🙂