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In Section B type questions, I came across a question which told to calculate EOQ.
The holding costs of one unit per annum was $2, purchase cost per unit was $480 and the cost of capital was 10%.Holding costs are calculated as $2+(480×10%)=$50.
Why do we add that $48, calculated from using purchase and capital costs?Because the most important cost of holding inventory is the cost of the money tied up in the inventory.
Given that each unit costs $480, then the interest cost of holding one unit in inventory for one year is 10% x $480.
I do explain this in my free lectures. The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
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