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Hello, when determining the cost of holding for Economic Order Quantity (EOQ), should we incorporate the opportunity cost? If so why?and additionally, how can this opportunity cost be accurately calculated in such scenarios?
When determining the cost of holding for Economic Order Quantity (EOQ), it is important to incorporate the opportunity cost. The opportunity cost refers to the potential return or benefit that could have been gained by using the funds tied up in inventory for alternative investments. By considering the opportunity cost, a more accurate assessment of the total cost of holding inventory can be made.
To calculate the opportunity cost in such scenarios, the interest rate that could have been earned on the funds tied up in inventory is multiplied by the value of the inventory.
This provides an estimate of the potential income that could have been generated if the funds were invested elsewhere. The resulting amount is then included as part of the holding cost in the calculation of the total cost of holding inventory for EOQ.
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