EOQ

Regarding the finance costs, the formula for EOQ does not explicitly include finance costs. However, finance costs can be considered as part of the holding cost per unit if they are CLEARLY related to the cost of holding inventory. In this case, if the finance costs are CLEARLY & directly related to the inventory holding, they can be included in the calculation of the holding cost per unit. Only do if clearly identified....... If it says something along the lines that the cost of tying up money in inventory, could have been used to earn interest or could result in interest expenses - say if the company is overdrawn. Why? Including finance costs in the holding costs for a company could provide a more accurate reflection of the total cost of holding inventory. However, it is important to note that the decision to include finance costs ultimately depends on the specific context and requirements of the question.

Sir, how is (2 x 80,000 x $75) / $0.70)^0.5 = 2828? Isn't it 4140? Also, in Dusty co, holding costs did not include finance costs when calculating EOQ So which approach should we follow in the exam?

I just checked the answer and its 2828 and they included the finance costs by taking (purchase price 8 *10%=0.8) therefore total holding costs = $1.5. This question was from the Pre Dec 2021 mock exam. Now I'm really confused!

So sorry your confused Well let’s see Annual demand (D) = 40 orders x 2,000 units per order = 80,000 units Ordering cost per order (Co) = $75 Holding cost per unit (Ch) = $0.70 +$ 0.8 ( 10% * 8) Plugging these values into the formula: EOQ = ((2 x 80,000 x $75) / ($0.70 + $0.80) EOQ = 2,828 units So in answer to your question this one did include it!! This proves that if it’s in the question it means include it! I am very tired I must apologise If I have confused you

Great thanks a lot! Just want to know why dusty co excluded finance costs when calculating EOQ...the inconsistency is what is confusing me :(

The question asks for the current cost and then eoq The thing is when you have eoq you are saving on inventory Annual holding and ordering costs of the current inventory management system Each current order is 1,500,000/12 = 125,000 units per order Average inventory = 125,000/2 = 62,500 units Current holding cost = 62,500 x 0·21 = $13,125 per year Current ordering cost = 12 x 252 = $3,024 per year Current total inventory management cost = $13,125 + $3,024 = $16,149 per year Financial effect of adopting EOQ model EOQ = (2 x 252 x 1,500,000/0·21)0·5 = 60,000 units/order Number of orders = 1,500,000/60,000 = 25 orders per year Average inventory = 60,000/2 = 30,000 units Holding cost = 30,000 x 0·21 = $6,300 per year Ordering cost = 25 x 252 = $6,300 per year EOQ total inventory management cost = $6,300 + $6,300 = $12,600 per year Then you compare the two Reduction in total inventory management cost = $16,149 – $12,600 = $3,549 per year So what does that do for your business? Reduction in average inventory So you don’t buy as much inventory = (62,500 – 30,000) x $14 pu = $455,000 The overdraft will decrease by the same amount. Finance cost saving = 455,000 x 0·03 = $13,650 per year Overall saving = $3,549 + $13,650 = $17,199 This is like what I was referring to Do you understand My advice is don’t worry about it anymore If in the exam it isn’t clear in a written question State your assumptions It will be marked as OFR which means you only loose the marks for that small part move on……. Everything else is marked Own Figure Rule

If I calculated EOQ using holding costs of $0.63 (0.21+(14*0.03)) would that be fine?