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EOQ

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › EOQ

  • This topic has 1 reply, 2 voices, and was last updated 7 years ago by John Moffat.
Viewing 2 posts - 1 through 2 (of 2 total)
  • Author
    Posts
  • June 4, 2018 at 8:57 am #455937
    ziniya
    Member
    • Topics: 14
    • Replies: 4
    • ☆

    Sir please help me with this question.

    The production manager has established the following information about a major
    inventory item.
    Purchase price per unit $480
    Annual demand 4,000
    Supplier’s delivery costs per order $10
    Chief buyer’s salary per annum $30,000
    Total number of orders placed per annum* 1,000
    Annual storage costs per unit $2
    Cost of capital 10% per annum
    *Relates to all product lines, not just this one.
    What is the economic order quantity for this inventory item?

    Although I am clear with the other parts of the EOQ formula but y has the purchase price multiplied by the cost of capital to get through to the holding cost?

    Thanks,
    Regards

    June 4, 2018 at 3:39 pm #456023
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54762
    • ☆☆☆☆☆

    You really should watch my free lectures, because this is explained in the lectures!

    The cost of holding stock is the storage costs of $2 per unit, but also the lost interest on the capital tied up in inventory. Since each unit costs $480, there is capital tied up in inventory of $480 which will be costing 10% x $480 = $48 in interest per unit per year.

    The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.

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