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(5.9) A company determines its order quantity for a raw material by using the Economic Order Quantity (EOQ) model.
What would be the effects on the EOQ and the total annual holding cost of a decrease in the cost of ordering a batch of raw material?
EOQ
Total annual holding costAnswer is Both lower.
My question is that if ordering cost per unit is decreased so holding cost should increased why it is lowering. As you made a graph in lecture which showed that, with respect to order quantity, holding cost increases and ordering cost decreases. Really messed up. Please help.If you look at the formula for the EOQ, the order cost per unit is on top (the numerator).
Therefore if Co falls, then so does the EOQ.If the order quantity is lower, then the average inventory level is lower, and therefore the total annual cost of holding inventory will be lower.
None of the above conflicts with anything in my graph – my graph is showing the total annual holding cost and the total annual ordering cost.
Thank you professor.
Professor in question (7a.10) Bpp kit.
It is saying in explanation of answer that second statement is wrong because 210,000 is overhead incurred not overhead absorbed.
Overhead Incurred should be 413,200 so why it is saying this?In future, please start a new thread when you are asking about a different topic.
The overhead control account includes all of the indirect costs / overheads. These are not just expenses but also indirect wages and indirect stores costs. The total charges to the overhead account is 413,200 and the amount absorbed (transferred to work-in-progress) is 404,800.
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