inventory cost

A COMPANY PURCHASES 40000 units at even rate during the year .Each order from the supplier is 4000 units.the company holds buffer inventory of 400units. The annual cost of holding one unit of inventory $4 .WHAT IS THE TOTAL Annual cost of holding inventory? my answer EOQ= 8944 Q/2*Ch=8994/2*4=17988 17988+400=18388 which is wrong correct is 9600 i dont know how iam getting wrong plz help me in doing the above question

First question: Your EQO is wrong because there are 4 quarters in a year, and so D in the formula is 4 x 5000 = 15,000. (You have treated it as though there are 3 quarters in a year!)

Second question: You are not asked to calculate the EOQ - you are told that they order 4,000 units each time. (You cannot calculate the EOQ anyway because you are not told what the order cost is). All you are asked for is the cost of holding inventory. Since they order 4000 each time, the average inventory is 4000/2 = 2,000. In addition they hold buffer/safety inventory of an addition 400 throughout the year. So the total average inventory if 2000 + 400 = 2400 through the year, and the cost of holding it is 2400 x $4 = $9600. I really do suggest that you watch my free lecture on Inventory (if you have watched it already, then I suggest that you watch it again!). It is vital that you understand what is happening rather than just learn rules.

Thank u sir , I watched ur lectures and now I understand . It's great that u give me nice explanation . People like u are very few god bless u

Hi re: this question'.isn't the formula for calculating holding cost q/2* ch,so y in question 1 we used EOQ/2* ch to get 1000

Plz ignore that silly questiin' my mistake!!!!!

No problem. I hope you are OK with it now :-)