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Hello…
I have some problems with the following question.
Why did they multiply the purchase price per unit by the cost of finance and most important why is it included in the holding cost per unit?Monthly demand for a product is 10,000 units. The purchase price is $10/unit and the company’s cost of finance is 15% pa. Warehouse storage costs per unit pa are $2/unit. The supplier charges $200 per order for delivery.
Calculate the EOQ.
Answer:
D= 120,000 (10,000 x 12 months)
Co= $200
Ch= $3.50 ($10 * 0.15) + $2EOQ= 3703 units
Thanks 🙂
One of the most important costs of holding inventory (both in practice and in exams) is the cost of the money tied up in the inventory.
Each unit is costing $10 to buy. On every unit held in inventory, there is $10 spent that could have been earning interest (or saving interest) at 15%.Therefore the holding cost per unit per annum is 15% x $10 = $1.50 (together with any other holding costs – in this case plus $2 warehouse costs).
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