Economic batch quantity — OpenTuition Forums

BBrian7y ago

A manufacturing company uses 25,000 components at an even rate during a year . each order placed with the supplier of the components is for 2000 components which is the economic order quantity . the company holds a buffer inventory of 500 components . The annual cost of holding one component in inventory is $2 What is the total annual cost of holding inventory of the component? A. 2000 B. 2500 C. 3000 D. 4000 Sir in The opentution lectures of inventory When calculating the annual holding cost relating to the EBQ You simply Took the 2722/2 x 0.9 = 1224.9 x 3 and got $3675 So in this question of the bpp I did the same But I’m not getting the answer .. By the way Both questions are on EBQ ... Please sir assist us

John MoffatTutor7y ago#1

Ignoring for a moment the buffer inventory, the average inventory would be 2,000/2 = 1,000. With a buffer of 500, the average inventory throughout the year becomes 1,500. At $2 holding cost per unit, the total annual holding cost is 1,500 x $2 = $3,000

BBrian7y ago#2

How come I’m the opentution lectures they did calculate the annual holding cost differently by using EBQ .... This was the difference( 1-D/R ) In your lectures you did like this 2722/2 x 0.9 = 1224.9 x $3 = 3675 So my confusion is When the annual rate and annual demand is given as the question I sent you at first ... do we have to do an adjustment to calculate The annual holding cost Like this (1-D/R ) ??? Coz in your lectures when the annual rate and annual demand is given you did the adjustments... in the study guide of Kaplan they did not .... It’s confusing

John MoffatTutor7y ago#3

I suggest that you watch the lectures again!! The holding cost is only equal to 1-D/R when the company is producing its own goods. That is not the case here - they are purchasing them from a supplier in batches of 2,000 each time. The annual production rate and annual demand are not given in the question you posted! The annual demand is 25,000 and they are buying them from a supplier in batches of 2,000 each time.

BBrian7y ago#4

My apologies... I accept I must read the question analytically And sir If the annual production rate and annual demand are given we need to do according to the method which you did in the lectures isn't it ?

John MoffatTutor6y ago#5

Yes - if they are producing their own rather than buying from outside, and if you are given the rate of production.