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A company wishes to minimise its inventory costs. Order costs are $10 per order and holding costs are $0.10 per unit per month. Fall Co estimates annual demand to be 5,400 units. What is the economic order quantity?
A 949 units
B 90,000 units
C 1,039 units
D 300 unitsanswer:
The economic order quantity is 300 units.
CO = $10
D = 5,400 / 12 = 450 per month
Ch = $0.10
Why we should divide demand by 12? I think we should use demand for a year not for a month. Other solution is if we multiply holding cost per month with 12 (0.10*12= 1.2). why should we use whole holding cost figure? I don’t understand neither of these solutions.By all means use the demand per year of 5,400. But in that case you should use the holding cost per year as well. Then you get exactly the same answer. You can’t use the demand for one period and the holding cost for a different period – it would not make any sense.
Have you watched the free lectures on this, because I explain what we mean by the holding cost? (The lectures are a complete free course for Paper F2 and cover everything needed to be able to pass the exam well).
Thank you. I understand now. We should use holding cost per unit per year. Yes, I always watch your lectures. they are great.
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