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MA Chapter 6 Questions Inventory Control

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    • I know this reply is late to the commenter, but if anyone else was wondering, here’s the clarifications:

      Figuring out what happens to EOQ is pretty straightforward if either the holding cost (H) or ordering cost (S) changes. In the EOQ formula, H is on the bottom, so if H goes down, EOQ goes up (and vice versa). On the other hand, S is on the top, so if S goes up, EOQ also goes up (and the reverse is true too).

      Once we know what happened to EOQ, we can guess what鈥檒l happen to the costs. For example, if EOQ goes down, two things are likely to happen: (1) we鈥檒l have to place orders more often, and (2) we鈥檒l keep less inventory in storage on average. So, more frequent orders mean the total ordering cost (S) will go up, and less inventory means the holding cost (H) will go down.

      On the flip side, if EOQ goes up, we can say that (1) we鈥檒l order less often, which brings ordering costs down, and (2) we鈥檒l hold more inventory on average, which makes holding costs go up.

      In general, a smaller EOQ means ordering in smaller amounts, but more often to meet annual demand, while a larger EOQ means we order bigger amounts less often. The EOQ itself is just the order quantity that keeps total costs (holding plus ordering) as low as possible. The formula is EOQ= sqrt((2DS) / H), but the important thing is to make sure both demand (D) and holding cost (H) are for the same time period. So, if demand is quarterly, holding cost should be quarterly too; if demand is annual, holding cost should be annual. Mixing them up (like using quarterly demand with annual holding cost) will mess up the result.

  3. I have a question, when calculating the holding cost and it says for example the holding cost is 10% of the purchase price. Do you calculate 10% of the purchase price and then multiply it by 12 months to get the total cost for the year and then put that into the EOQ formula or do you simply calculate the 10% for one unit and put that into the formula?

    for some questions, I got the right answer by only putting 10% of one unit and for others it seems it expected us to multiply that price by 12 months to get the total annual cost?

    Please can you provide some guidance. thank you so much.

    • We need the cost of holding 1 unit in inventory for 1 year. Therefore if the interest rate is a yearly rate (as we would always assume to be the case unless told otherwise) the holding cost is the interest rate multiplied by the cost per unit. If on the other hand you are told the monthly cost of holding one unit, then the cost for a year is obviously 12 times this.

  5. Good morning sir, i dont seem to understand question 3. I thought the holding cost is $0.10 per unit per month which is 0.10 x 1000 x 12 giving 1,200. How come it is only multiplied by the months without the order units? Please can you explain this?

    • The optimal order quantity is the EOQ – the fact that they are currently ordering 1,000 per month is of no relevance at all.

      Secondly, the holding cost used in the EOQ formula is the holding cost per unit per year, which is 0.1 x 12.

      If you have not already done so then I do suggest that you watch my free lectures on this.

    • The opposite of my answer to the question immediately below yours!! 馃檪

      The EOQ will increase, and because it is higher there will be fewer orders place during the year which means that the total ordering cost over the year will be lower.

    • The holding cost is on the bottom of the formula for the EOQ, so if the holding coat increases then the EOQ will decrease.

      If the EOQ is lower then it means that more orders will have to be places during the year. If there are more orders then the total ordering cost over the year will be higher.

    • The current reorder quantity is not relevant because the question asks what will be the optimal (i.e. best) reorder quantity.

      For the formula we need the annual (I.e. yearly ) stockholding cost. $0.10 is the cost per month, and so the cost per year is 12 x $0.10.

  13. Hi?
    i would to find out why the period of 3 months was not taken into consideration in comparison to question three where the months were taking into account.thank you

    • I don’t know which question you are referring to because two of the questions refer to 3 months people (and question three doesn’t!).

      Both questions 1 and 5 have 3 month periods and in both cases the quantity was multiplied by 4 so as to make it a 12 months period.

      • Which question are you referring to? In question 3 there are no 3 month periods. The demand is 15,000 per year and the holding cost is 12 x $0.10 per year because there are 12 months in a year.

        The multiplying by 2 is because the formula for the EOQ has a 2 in it.

        Did you watch my free lectures before attempting the test?

  14. Denny122: The holding cost is on the bottom of the formula. Therefore if the holding cost increases, the EOQ will be lower.

    Since the EOQ is smaller, there will have to be more orders placed during the year. Therefore the annual order cost will be higher.

  16. I’ve a question

    Sky limited wishes to minimize its inventory cost.
    Its recorder quantity 1000units
    Order cost 10 per order.
    Holding cost 0.10 per month
    Estimates annual demand 15000units .

    What is the optimal reorder level (to nearest 100 units).

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