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working Capital EOQ

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › working Capital EOQ

  • This topic has 1 reply, 2 voices, and was last updated 4 years ago by John Moffat.
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  • Author
    Posts
  • November 5, 2020 at 8:34 am #594109
    aishakhalid97
    Participant
    • Topics: 8
    • Replies: 5
    • ☆

    hello sir
    hope you are doing well

    Sir for this question I don’t understand why they are adding 10% of 480 in Cost of holding per unit. isn’t it only holding cost? whats the relation to cost of capital

    QUESTION :
    The production manager has established the following information about a major
    inventory item.
    Purchase price per unit $480
    Annual demand 4,000
    Supplier’s delivery costs per order $10
    Chief buyer’s salary per annum $30,000
    Total number of orders placed per annum* 1,000
    Annual storage costs per unit $2
    Cost of capital 10% per annum
    *Relates to all product lines, not just this one.
    What is the economic order quantity for this inventory item?

    ANSWER
    40 UNITS

    Co = $10; D = 4,000; Ch = $2 + 10% of $480 = $50
    EOQ = ?(2 × Co × D ÷ Ch) = ?(2 × 10 × 4,000 ÷ 50) = 40 units
    The alternative answers come from either ignoring the cost of capital tied up in
    inventory or including the irrelevant chief buyer’s salary (or both).

    November 5, 2020 at 10:11 am #594144
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    I do not understand what you mean about ‘alternative answers’, because the correct answer is indeed 40 units and the working you give are correct and give 40 units.

    The chief buyers salary is irrelevant because it is fixed over the year and will not vary with the order quantity.

    The cost of capital is relevant, which is why the holding cost per unit per year is $2 + (10% x $480) = $50.

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