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Would you include storage costs in the demand for cash part of the calculation?
If you do and they give you the amount per unit per year would you need to make an adjustment as all of the units will not be in storage for the whole of the year?
Thanks
I am not sure what you mean by ‘demand for cash’.
If you are meaning that paying for storage means that there is money tied up paying for the storage costs, and that therefore we are losing interest on that money, then the answer is ‘no’ 🙂
In the exam, we only consider (in respect of lost interest) the money tied up actually paying for the goods. So the total cost per year is the average inventory level multiplied by the interest of one unit for one year.
Obviously there could be the extra cost of the storage itself, but you would be given this as a cost per unit per year. The total cost over the year is the average inventory level multiplied by the cost per unit per year.
Sorry I think I’ve confused myself even more – the question states the cost of placing an order is $25 and the storage cost for product X is $0.10 per unit per year.
If the demand for the products is 255,380 units and the purchase price is $11, should the figure that I put into the EOQ equation be $2,809,180? Or should I also add on an additional $25,538 because this cost is related?
Co is the cost of placing each order – in this case $25
Ch is the cost of holding one unit in inventory for one year – in this case $0.10
D is the total demand per year – in this case 255,380
The purchase cost is not relevant because however many we order each time, the total quantity ordered will be the same – 255,380 – and so the total purchase cost over the year will be the same.
(It might be worthwhile watching the lectures on this for the F2 paper, because for this topic F9 is the same as for F2)