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Sir, I have read your answer in another thread regarding EOQ please help me understand completely.
1) We always include Finance cost to the Holding cost because the money is tied up in the inventory rather it could have been used to earn interest on deposit in the bank so we are losing interest income.
2) Are we allowed not to include Finance cost in the calculation of Holding cost because I have seen in other questions (like KXP Co in BPP kit) where we have not included finance cost in the Holding cost even though we are given an overdraft interest rate of 6% in the question?
3) Finance cost is calculated on the Purchase cost $/unit which will be added to Cost of Holding? BUT Why Purchase cost is used to calculate overdraft interest – please explain!?
4) If we include Finance cost in the calculation of Holding cost then we would include Finance cost when calculating Current Policy / EOQ Policy or Bulk Discount Policy (Finance cost would be used & included in Holding cost for all of them!)
Need your help. Thank you!
1. Yes. The money tied up could have been earning interest (or if we are overdrawn, would have meant paying interest).
2. It depends on the wording. Since this question says that the holding cost is 24 cents per unit we assume that the interest cost has been including already int he calculation.
3, What is paid for the unit is the amount that is tied up and is therefore costing interest.
4 Yes we would, and this is all illustrated with examples in my free lectures.
Sir,
there are 3 key terms missing in your lectures. Need to know the reason. Are they not important and will not come in exam? They are:
1) Max. Inventory lvl
2) Min. Inventory lvl or buffer safety inventory
3) Average InventoryAll the three above are in the student book with examples provided and solved through formulaes.
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