Hello Sir,
I will be grateful if you can help with this question.
A company uses component at the rate of 6000 unit per year, which are bought in at a cost of $1.20 each from the supplier. the company orders 1000 units each time it places order and average inventory held is 500 units. it cost $20 each time to place an order regardless of the quantity ordered.
The total holding cost is 20% p.a of the average inventory held.
What is annual holding cost and annual ordering cost?
My workings:
Annual holding= ch * average inventory
100*500=50,000
Annual ordering = 20* D/Q
20* 6000/1000
20*6=120
Please, is my calculation correct?
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MAF2 Inventory control
11y ago#1In future, if you wish me to answer the please ask in the F2 Ask the Tutor Forum - this forum is for students to help each other :-)
Your annual ordering cost is correct.
However, your annual holding cost is wrong.
The average inventory is 500 units, but the holding cost per unit per year is 20% x $1.20 = $0.24.
So the annual holding cost is 500 x $0.24 = $120.
Thank you for your prompt response. I apologise for posting on wrong forum.
I am sorry, my question is posted here again, it's because it is the continuation of the above.
I am a little bit confused on how the holding cost was calculated, please explain why it was calculated as 20% of purchase cost. And what is the difference between annual holding cost and total holding cost.
Thank you for your time.
If buffer inventory is given in the question will we add that in cost of holding formula
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