Could you please explain more about the relationship among EOQ, holding cost and ordering cost? I couldn’t get the right answers for Q2 and 4. Thank you.

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.

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?

I don’t know what you have done wrong because I cannot see your workings. Have you noticed that in both questions in mentions 3 months and you need to convert them to years? (And have you looked at the workings for the answers that appear if you click ‘review quiz’ after submitting your answers?)

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.

I couldn’t solve the Qu4. Doesn’t the EOQ increase when the holding cost increases? I also didn’t understand the relation between ordering cost and holding cost.

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.

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

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?

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).

DWilliams@ says

Please could you further explain why we are multiplying the holding cost by 12?

John Moffat says

Because there are 12 months in a year 馃檪

Myo94 says

Hello Sir,

Could you please explain more about the relationship among EOQ, holding cost and ordering cost? I couldn’t get the right answers for Q2 and 4. Thank you.

sxrxxwxn says

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.

John Moffat says

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.

darshan.69 says

I completely missed question 3 , what is the formula to calculate reorder quantity.

John Moffat says

Optimal order quantity means the same as the economic order quantity 馃檪

darshan.69 says

thank you John , Got it.

Salexy says

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?

John Moffat says

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.

oteoag says

Nice challenge got 100%

accaleerah says

Good day sir. I don鈥檛 seem to get qn 1 and 5 correct no matter how i follow the given workings. Where might i be going wrong?

John Moffat says

I don’t know what you have done wrong because I cannot see your workings. Have you noticed that in both questions in mentions 3 months and you need to convert them to years? (And have you looked at the workings for the answers that appear if you click ‘review quiz’ after submitting your answers?)

kenedykassa says

Very useful!!!

Chiderah says

Good day sir, just a question: Q: what would be the effect on EOQ and ordering costs, if there is a decrease in holding costs?

John Moffat says

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.

parveen3003 says

Hello sir!

I couldn’t solve the Qu4. Doesn’t the EOQ increase when the holding cost increases? I also didn’t understand the relation between ordering cost and holding cost.

Thanks in advance!

John Moffat says

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.

Ashutosh770 says

Hi sir, in the 1 st question it says three month so why did you multiply it by four by the way thank you for the lecture

Ashutosh770 says

Ohh sorry ,I got the answer

Asif110 says

Such an important eye opener quiz. Thankyou. Grateful.

guyver101 says

In Qu2 when it says “cost of ordering”, this seems a bit ambiguous. I read it as the ‘re-order costs’, but it actually means ‘Purchase cost’.

John Moffat says

It doesn’t mean the purchase cost. It means what it says – the cost of ordering a batch of material, and that is the re-order cost.

safashaikh19 says

sir i dont understand the 3rd question (Sky ltd). why do we 0.10*12 in the formula? and what is the role of the reorder quantity i.e. 1000?

John Moffat says

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.

musalampondo says

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

John Moffat says

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.

JoshuaMburu says

Hi, I also don’t quite get it, when multiplied by four, the answer should be 1000 not 500, ?4 = 2

John Moffat says

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?

John Moffat says

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.

denny122 says

For question 4, I am unsure of why the EOQ costs will be lower when the holding costs increase?

Thank you.

maheracca1 says

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).

John Moffat says

Use the EOQ formula. It is the sq root of (2 x 15,000 x 10) / 0.10

kamariddin says

Sir, you forgot to multiply 0.10 by 12 as we need annual holding cost

John Moffat says

Goops – you are correct. Thanks 馃檪

Sahaijsjsjaioafnn says

Ha ha !!! You are Funny.

adnan111 says

In question 5 why is it taking cost of ordering one product 20$ as it is clearly mentioned the purchase price of one product is 15$.

John Moffat says

But is also clearly stated the the ordering cost is $20. This has nothing to do with the purchase price.

You really should watch the free lectures before attempting the test!!

adnan111 says

Why is it taking 6%of reorder cost instead of cost of one unit in question 1.

And how is the answer 1461 instead of 1633

John Moffat says

The answer is not taking 6% of the reorder cost. It is taking 6% of the purchase price of $25.

The answer is 1,461 which is what results from using the formula. I have no idea how you managed to arrive at 1633!

odung says

I want to know how we got 2225 while calculating holding cost. Because we got 1600 then how about 2225?

Thank you.

John Moffat says

You will have to say which question you are referring to.