How much to order, Managerial Accounting

Assignment Help:

How much to order

Supposing the estimated annual usage of a component by Machinery Ltd is 20,000 units.  Usage is even throughout the year and only one order per annum is placed with the supplier.  Because only one delivery is made, average stock will be high, i.e. 20,000/2 = 10,000 and consequently stockholding costs will be very high. On the other hand, the costs of ordering will be negligible. If two orders are placed there will be less in stock (i.e. average 5,000), which will reduce holding costs, but ordering costs will increase. Thus, the higher the number of orders placed, the lower are stockholding costs, but the higher are ordering costs.

Stockholding costs include interest on the capital invested in stocks, storage, insurance, rates, security, building maintenance, heating, etc. Ordering costs include buying-department staff costs, receiving and handling.

Assuming that the cost of each component is £10, that holding cost is 10% of stock value and the cost of placing an order is £1, the total annual cost of stockholding and ordering when different numbers of orders are placed, is as follows:

2292_table.jpg

 

1202_graph.jpg


Figure: Economic Order Quantity

Placing 100 orders a year results in the lowest of ordering and holding cost of £200, therefore the economic order quantity is 200 units.

The same information is graphed in figure above, showing that the economic order quantity (EOQ) is the point where ordering and holding costs are equal, and total £200.

 

 


Related Discussions:- How much to order

Financial perspective, Financial Perspective How do we produce value fo...

Financial Perspective How do we produce value for our shareholders? This perspective covers traditional measures e.g. growth, liability, shareholder value. But these are set on

Explain direct labor cost standard, Explain Direct labor cost standard ...

Explain Direct labor cost standard The setting up of standard labor cost for each product would require: a) The determination of budgeted fixed overhead for a period b) B

Cvp analysis and computer applications, CVP ANALYSIS AND COMPUTER APPLICATI...

CVP ANALYSIS AND COMPUTER APPLICATIONS The output from a CVP model is only as good as the input. The analysis will include assumptions about sales mix, production efficiency, p

Case study, Susan works in a real estate office that is equipped with up-to...

Susan works in a real estate office that is equipped with up-to-date copiers, scanners, and printers. She is frequently the only employee working in the office in the evenings and

State the important assumptions of break-even analysis, Assumption of break...

Assumption of break even analysis The break even analysis is based upon the following assumptions : 1) All elements of cost, i.e., production , administration and selling di

Theory of metagames, THEORY OF METAGAMES This theory appears to describ...

THEORY OF METAGAMES This theory appears to describe how most people play non-zero sum games involving any number of persons. Prisoner's dilemma is an example of this; the ai

Costs and benefits of factoring, Two types of costs concerned in factoring ...

Two types of costs concerned in factoring are as: 1) The service fee or factoring commission 2) The interest on advances granted through the factor to the firm. Factoring

What are the objectives of budgetary control, What are the Objectives of bu...

What are the Objectives of budgetary control 1) Planning : planning is an important managerial function. it helps to decide in advance, what to do how to do it when to do it a

Determine the absolute liquid ratio - liquidity ratios, Absolute liquid rat...

Absolute liquid ratio - Liquidity ratios Although receivables debtors and bills receivable are usually more liquid than inventories yet there may be doubts regarding their rea

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd