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Question
A manufacturer uses 100,000 components costing $1 each at a constant rate throughout the year. The cost of making a single order for more components is $10 and the holding cost for each component are 0.5% of the average inventory value.
What is the EOQ?
A 1,411
B 2,000
C 14,142
D 20,000acc to formula of EOQ = ?2 x Co x D / Ch
I’m able to find the value of 2 x Co x D which is 20,00,000
But I’m not getting how to find Ch ?If I used total annual holding cost ? How to find average inventory value?
Normally average inventory formula is = quantity / 2
So it should be 100,000 / 2 x 0.5%
But in the answer they have written the value of Ch = 0.005
How?Ch is the cost of holding one unit of inventory for one year. In this example it is 0.5% x $1 which is $0.005.
Have you watched my free lectures on this? The lectures are a complete free course for Paper MA and cover everything needed to be able to pass the exam well 🙂
The question as you have typed it is asking for the EOQ and not the average inventory value.
The EOQ using the formula is the square root of (2 x 100,000 x 10) / 0.005 = 20,000 units.
Again, have you watched my free lectures on this?
Yes I have watched lectures on this but here I think you misunderstood me.
My doubt was they are asking the value of (Ch)which is 0.5% of average inventory value. So why you take 0.5% of $1?
I know Ch is holding cost of one inventory but they are confusing by writing the average inventory value. I hope I explained you my doubt clearly.Whatever the wording, Ch for the formula is always the cost of holding one unit in inventory for one year as I make perfectly clear in my lectures.
The total holding cost will be Ch multiplied by the average inventory (as again I illustrate in my lectures) but for the EOQ formula it is always as I have written in my first sentence and in my previous reply.
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