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FM Chapter 4 Questions – Management of working capital (2) – Inventory

 

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  2. Dear Sir.
    Please I do not understand the logic in question 2 of chapter four.
    If Inventory ordering cost to be decrease we have to order more inventory
    for decreasing the frequency of ordering.
    If we do so our level of inventory should increase as a result holding cost increases
    but the answer stats both EOQ & Holding cost declines
    Thank you very much for usual cooperation!!

    • If you look at the formula, then if Co is lower the EOQ will be lower to. (We will be placing more orders to get the same quantity in total, which makes sense because the cost of ordering each time is lower)

      If the EOQ is lower then the average inventory is also lower and therefore the annual holding cost will be lower as well.

  3. Hello dear, I have not quite get Q2. Now if ordering costs are decreasing, it means we make fewer orders, therefore higher quantities of inventory are held each time. Doesn’t this mean holding costs are increasing? Please answer my question.

  4. Hi John Thanks for your Many Help but Question one is troubling me. Please where did 2 come from.
    My solution would have been below:

    Purchase Price = $25
    3 Month demand = 20,000
    Annual Demand = 20,000 X 4 = 80,000
    Cost of order = 20
    Cost of holding = 6% of $25 = 1.5
    Therefore, EOC = square root of (80,000 X $20)/ 1.5 = 1,032.80

    please where did i get it wrong?

  5. Dear John,
    there is mathematical error in your calculation for question 1.

    EOQ Units= 730

    2*20,000*20/1.5=533,333

    =sqrt(533,333)

    =730.29 units

    but your suggested answers says 1461 units

  6. Hi,

    If compared the response in Question 2 with example 1 done by you in Chapter 1, I understand vice-versa. So, in example 1 as per calculation we have increase in EOQ(from 500 units to 750 units), that lead to decrease in ordering cost, and respectively the increase in holding costs. From the graph in this chapter i understand that if cost of ordering decreases this lead to increase in holding costs and so on. Can you please explain me what am thinking wrong?
    Thanks in advance 🙂

  8. thanks for the questions sir. but i have a bit of a problem with how Co affects holding costs. i initially assumed Ch as the holding costs and thought they do not have any effect on the Co

    • I guess you are asking about question 2?
      If so, then Ch is the holding cost per unit and the question asks what will happen to the total holding cost per year.

      If the order cost decreases, then the EOQ decreases. If the EOQ decreases then the average inventory decreases and therefore the total holding cost per year decreases.

    • Example 3 says to use the information given in Example 1.

      You should only be using the lecture notes if you are watching the lectures. It is in the lectures that I explain and expand on the notes (and I work through this example in the lectures). If you are not watching the lectures for any reason then you must buy a Study Text from one of the ACCA approved publishers and study from there.

  14. I am confused about F9 chapter 4 question 2. I thought EOQ will increase when ordering cost decreases. The formulae even proved my point. But I stand to be corrected. Can you pls clarify that a bit?

  15. Hello. I was just revising all these chapters by doing these practise questions. They’re really helpful . But question 5 of this question says that JIT approach may lead to more inventory shortages. But from what we’ve learnt from the lectures and notes. JIT ,tries to make sure there r no shortages of inventory when we need them by either getting suppliers to supply immeditaly and by training the working. So with this approach. Jit shouldn’t really cause of problem with inventory shortages right?

      • To add to what John Moffat said, assume the supplier has sent out the order but the delivery van develops a fault on the way. This would mean the client could ran out of inventory for the hours or days required to fix the van or arrange alternative transportation.
        That’s the risk in JIT … you have no buffer to fall on!

  16. Hello. As part of the study programme, I want to complete the Past Exam Question (Specimen Q1) however, Q1 does not seem to have anything to do with “Management of Working Capital – Inventory”. Am I misunderstanding the study programme/the actual question or is it incorrect?

  17. why working examples have no answers to check against mine I have worked out to make sure everything is 100% correct. Even some are straight forward but it is to maximise marks as much as possible

    • If you are talking about answers to the questions in this test, then a pop-up window appears with the answer and workings when you submit your answer. Maybe you have a pop-up blocker, in which case you should turn it off!!

      (If you are talking about answers to the examples in the lecture notes, then the answers are all in the lecture notes. Also I work through all the example in the free lectures that go with the notes, and it is completely pointless to use the notes without watching the lectures that go with them.)

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