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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=50,000Annual ordering = 20* D/Q
20* 6000/1000
20*6=120Please, is my calculation correct?
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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.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.
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