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
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EOQ
8y ago#1You 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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