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Question in EOQ

Forums › ACCA Forums › ACCA MA Management Accounting Forums › Question in EOQ

  • This topic has 2 replies, 3 voices, and was last updated 13 years ago by ishaqbboy.
Viewing 2 posts - 1 through 2 (of 2 total)
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    Posts
  • July 20, 2012 at 5:04 am #53827
    sarahlim
    Participant
    • Topics: 21
    • Replies: 37
    • ☆☆

    Dear all,this is the question from ACCA examiners’ report Jun’08
    A manufacturing company uses 25,000 components at an even rate during a year. Each order placed with the
    supplier of the components is for 2,000 components, which is the economic order quantity. The company holds
    a buffer inventory of 500 components. The annual cost of holding one component in inventory is $2.
    What is the total annual cost of holding inventory of the component?
    A $2,000
    B $2,500
    C $3,000
    D $4,000

    The Correct Answer is C and the working is as below:-
    {[Buffer inventory + (EOQ ÷ 2)] × Annual holding cost per component} which gives
    {[500 + (2,000 ÷ 2)] × 2} = 3,000.

    Why 2000 have to divide 2?? Plz answer TQ

    August 29, 2012 at 8:45 am #102043
    ishaqbboy
    Member
    • Topics: 2
    • Replies: 5
    • ☆

    yes the answer is correct and its really easy.
    the formula for calculating total annual cost of holding inventory = average inventory x holding cost per unit per annum

    average inventory = (reorder quantity÷2) + buffer stock

    and it says that comapany orders at eoq so thats the reason its divided by 2

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