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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,
RegardsYou 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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