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Professor,
I have seen multiple questions which require that I estimate the annual cost of inventory, meaning holding cost+ ordering cost (1). However, there are some questions which are solved by also estimating the overall inventory cost. What I am trying to say is, they estimate an annual holding cost and an annual ordering cost while estimating the overall cost of the inventory as well (assume demand 500.000 units for 2 dollars each 1.000.000 dollars spent on inventory). This will lead to: annual holding cost+annual ordering cost+annual inventory cost (2). Which estimation should I use? Although most questions are solved with (1) I have lost marks on mock exams for picking (1) and not (2), and sometimes for picking (2) and not (1).
Thank you for your time!
This should not be a problem in the real exam for several reasons.
In the MCQ’s it is more likely you would be asked for the EOQ rather than the associated cost.
If you are asked for the associated cost then it is usually (1) that is what is wanted unless you are specifically asked for all the costs involved (or if there are quantity discounts, in which case we have to consider the total cost).If anything is asked on this in Section C of the exam (the long-form questions) then it will relate to cost savings by changing the order quantity, in which case it is irrelevant whether or not you bring in the total purchase costs (because that will remain the same) unless, again, there are quantity discounts involved.
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