How much to order, Managerial Accounting

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.

 

 

Posted Date: 12/5/2012 8:01:48 AM | Location : United States







Related Discussions:- How much to order, Assignment Help, Ask Question on How much to order, Get Answer, Expert's Help, How much to order Discussions

Write discussion on How much to order
Your posts are moderated
Related Questions
INVENTORY CONTROL The activities of a business during a financial year combine investment projects in progress with new projects commencing and others terminate within the year

What is period cost Period costs are those costs which are reported as expanses of the period in question. These are cost which are not assigned to the product but are charged

a certain company makes 3 products A,B and C and they use the same raw material zhong.details about each product is as follows.production units are 10 000 for A,8 000 for B,12 000

Adm2341 manufactures and sells four different products. The following data are extracted from the most recent financial statements:   Products


In the current corporate world, this is a common practice of companies along with surplus cash to lend to another company for a short period generally ranging from 60 days to 180 d

State (or select) the dependent variable (Y) Will the CER be employed to estimate price, labor hours, cost, material cost, or some other measure of cost? Will the CER be employ

Describe the Principles of cost accounting Principles of cost accounting: The fundamental principles of costing are identical and are given below:   1. Cost is related to

What is your base rate for graduate level accounting? If I decide to use your service can the tutor and I speak via skype? I''m not located in the U.S.

Quick ratio Meaning: this ratio establishes a relationship among quick assets and current liabilities Objective: the objective of commuting this ratio is to calculate th