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Hello John
-Purchase price per unit=$480
-Annual Demand=4,000
-Supplier’s Delivery Costs per order=$10
-Chief Buyer’s Salary per annum=Rs 30,000
-Total Number of orders placed per annum=1,000
-Annual storage costs per unit=$2
-Cost of Capital=10% per annum.What the EOQ?
1. In the answer,the CH is calculated as follows:
-$2 + 10%of 480=$502. Could you please explain why the cost of capital was taken into account?
Thanks
As I explain in my free lectures, one of the most likely costs of holding inventory is the interest cost on the money tied up in inventory. The more inventory is held then the more money is invested in the inventory which is losing interest that could otherwise be earned on the cash.
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