why was total purchase cost (20*40000) while calculating the annual inventory cost at different reorder quantities was not included in the calculation?

Because unless there are quantity discounts (which is covered later in the lectures) then the total purchase cost over the year is the same whatever the order quantity, and is therefore not relevant to the decision.

Excellent lecture as usual. Not only these lectures are interesting to watch but your brilliant explanations with examples make them 100 times easier to understand. These lectures are billion times better than any paid coaching.

In management accounting, when using the EOQ formula we assume that the inventory holding cost will be half of the quantity ordered multiply into inventory holding cost value value, and then we assume that this is what it is going to cost us for the whole year but does it give us the holding value of just one ordered batch? since we are going to incurr the same cost of all the future batches they why dont we multiply it by future order number as well?

sxrxxwxn says

Where did the total of $2225 come from after the the $625?

John Moffat says

It was added to the 1,600 above it (the reorder cost).

Rajshekharrsf says

why was total purchase cost (20*40000) while calculating the annual inventory cost at different reorder quantities was not included in the calculation?

John Moffat says

Because unless there are quantity discounts (which is covered later in the lectures) then the total purchase cost over the year is the same whatever the order quantity, and is therefore not relevant to the decision.

Rajshekharrsf says

Excellent lecture as usual. Not only these lectures are interesting to watch but your brilliant explanations with examples make them 100 times easier to understand. These lectures are billion times better than any paid coaching.

John Moffat says

Thank you for your comment 馃檪

HimanshuSingla says

In management accounting, when using the EOQ formula we assume that the inventory holding cost will be half of the quantity ordered multiply into inventory holding cost value value, and then we assume that this is what it is going to cost us for the whole year but does it give us the holding value of just one ordered batch? since we are going to incurr the same cost of all the future batches they why dont we multiply it by future order number as well?

John Moffat says

The average inventory level (which is half the order quantity) is the average level throughout the year.

We multiply by the holding cost per unit per year and so the result is the total holding cost for the year.

AbuAsad says

There is a variation on the Total Holding Cost equation where we add min inventory to Q/2 , when can and can’t we use this variation of the equation ?

John Moffat says

If you are given the demand per month, then multiply by 12 to get the demand per year.

fruitella says

When Demand units given on per month how to calculate eoq ? It鈥檚 demand units * one year quarter 4 or demand units * 12 months which one is correct ?