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fixed cost is a cost that doesn’t vary with activity level…………..by variable cost does.
in EOQ graph it shows the point where Ordering cost and Holding cost meet is the EOQ
now in the graph the holding cost shows a increasing straight line and yes it does vary with units we hold.The more units we hold more will be the holding cost, while the ordering cost is like a downward sloping curve which refers to semi variable cost.
My question is
1. I want to know what does this ordering cost and holding cost are behaviour wise.
2. Holding cost also include warehouse cost, which is fixed.So how can it be variable.
3. Ordering Cost include only those cost which will happen when we place an order,so it shouldn’t have any fixed cost into it
or it can be like this
ordering cost , holding cost are made up of other costs so it can’t be stated as fixed or variable.
Its shown in the EOQ graph as per assumption that holding cost per unit remains same so its a straight line while ordering is a downward sloping one
The ordering cost is not semi-variable at all! It is variable with respect to the number of order (so inverse with regard to the order quantity).
1. Both costs are variable on the graph.
2. Any fixed holding costs are not relevant for either the formula or the graph – they stay the same regardless of the order quantity and so it is the total variable costs that we are trying to minimise.
3. So? Again, the order cost used in the formula is the variable cost per order.
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