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A manufacturing company uses 25,000 components at an even rate during a year. Each order placed with the supplier of the components is for 2,000 components, which is the EOQ. The company holds a buffer inventory of 500 components. The annual cost of holding one component in inventory is $2.
What is the total annual cost of holding inventory of the component?This forum is not here to simply provide full answers to test questions.
You must have an answer in whichever book you found the question, and you should ask which part of the answer is causing you a problem. If you have not got an answer then it is either because you have been set the question as homework (and we are not here to provide answers to homework) or you are not using a sensible book – you should use one published by the one ACCA approved publishers, because they contain answers to all the questions (as do the test questions on this website).
The average inventory is 2,000/2 = 1,000, plus the buffer of 500 is 1,500 units.
Therefore the total annual holding cost = 1,500 x $2 = $3,000.I do suggest that you watch our free lectures – the are a complete course for Paper F2 and cover everything needed to be able to pass the exam well.
I still have a question why average inventory is 2,000/2 = 1,000plus the buffer of 500
The average inventory is always 1/2 of the order quantity and the order quantity is 2,000.
So the average is 1,000 units. In addition they keep an extra 500 units as safety/buffer inventory throughout the year.
Therefore they have on average 1,500 units throughout the year.
Again, you should watch our free lectures.
THC = x/2 X CH
THC= total holding cost
x= order quantity
CH=holding cost per unit( one needs to add $500 as the Tutor explained as safety inventory)
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