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Forums › ACCA Forums › ACCA MA Management Accounting Forums › Optimal reorder level
Annual demand for raw material is 1 000 000 units. Each unit costs 15 cents. Procurement costs for each are 20$ and lead time has been estimated as 2 days. There are 250 working days per annum, the carrying cost of inventory is 10 cents per unit and the cost of stockout is 20 cents per unit.
What is optimal reorder level?
Workings:
Demand per day = 1 000 000/250 = 4000 units/per day
Demand in the lead time = 4000 x 2 = 8000 demand for units in a lead time
I cannot figure out how to ‘attack’ this one. If anyone can help i will be deeply greatful:-)
Economic Order Quantity formula given in exam: EOQ=?2 x Co x D
__________
Ch
? meant to be a square rooted after calculation, only symbol I found in Word.
Co – cost to place an order
D – annual demand
Ch – annual holding cost per unit
2 times Co times Demand, then divide by the Ch, then find the square root.
2 x $20 x 1 000 000 units = 40 000 000
40 000 000 divide with $0.10 = 400 000 000
find square root of 400 000 000 = 20 000 units
I hope this helps.
Hello!
I have a question regarding exercise 6.19 in ACCA F2 revision kit. Why do we dicount annual holding cost? I was convinced we should only use a 2% discount of the purchase price. IMO we should do the calculations using Ch=$4.5 in both cases. In the exercise there is nothing about the change in the cost of holding/unit.
Thank you in advance!