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Trout plc keeps ‘caviar’ in stock for which annual demand is 2,000,000 kgs. The cost of placing an order for the ‘caviar’ is $100 and the cost of holding one kg of ‘caviar’ is $1.00 per year. Trout plc uses the economic order quantity (EOQ) to derive the optimal order quantity for ‘caviar’. It can be assumed that demand for the item will remain constant throughout the year.
What is the annual cost of stock holding and stock ordering for ‘caviar’?
a $10,000
b $20,000
c $30,000
d $40,000Answer – C
EOQ = ?(2*2,000,000*100/1) = 20,000 units.
N* = D/Q* = 2,000,000/20,000 = 100.
TVC* = (N*. Cost of ordering) + (Q* . Cost of holding/2)
= (100*100) + (20,000*1/2)
= 10,000 + 10,000
= 20,000.But, the answer is $30,000. I did recalculation several times but I couldn’t find out the error. Could you please?
Assuming that you have copied the question correctly, and there is no mention of them holding safety/buffer inventory, then the correct answer is not C and is indeed B.
It would seem there is a mistake in your book.
(Does your book not show workings with the answers? If not then you should be using a Revision Kit from one of the ACCA approved publishers.)This question is from Bpp q47,please may you kindly assit me EE Co has calculated the following in relation to its inventories.
Buffer inventory level 50 units
Reorder size 250 items
Fixed order costs $50 per order
Cost of holding onto one item pa $1.25 per year
Annual demand 10,000 items
Purchase price $2 per item
What are the total inventory related costs for a year (to the nearest whole $)?You obviously have a printed answer in the BPP Revision Kit, so please say which part of the answer you are not clear about – then I will try to help you 🙂
yes sir,my problem is the annual holding stock calculations about the buffer cost. is there a way of understanding the calculation without using the formula
You have to use the EOQ formula to get the order quantity and the average inventory (ignoring buffer inventory) will be half the EOQ.
This is all explained in full in the free lectures.If they hold buffer inventory, then the inventory throughout the year is higher than the otherwise average inventory by the amount of the buffer, because they are holding the extra inventory throughout the year.
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