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Account for Material – EOQ

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA MA – FIA FMA › Account for Material – EOQ

  • This topic has 5 replies, 2 voices, and was last updated 1 month ago by John Moffat.
Viewing 6 posts - 1 through 6 (of 6 total)
  • Author
    Posts
  • February 1, 2023 at 1:10 pm #677850
    sagarm
    Participant
    • Topics: 5
    • Replies: 6
    • ☆

    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 20,000

    acc 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?

    February 1, 2023 at 5:40 pm #677863
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51898
    • ☆☆☆☆☆

    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 🙂

    February 2, 2023 at 6:16 am #677879
    sagarm
    Participant
    • Topics: 5
    • Replies: 6
    • ☆

    But in the question they are asking average inventory value ?

    February 2, 2023 at 9:01 am #677937
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51898
    • ☆☆☆☆☆

    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?

    February 2, 2023 at 2:27 pm #678025
    sagarm
    Participant
    • Topics: 5
    • Replies: 6
    • ☆

    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.

    February 2, 2023 at 5:31 pm #678182
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51898
    • ☆☆☆☆☆

    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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