Economic Order Inventories: Cost And EOQ Approach?

5457 Words 22 Pages
Register to read the introduction… The inventories consume a large part of budget, space, overheads and maintenance (Appadoo et al, 2012. The cost of holding the inventories are the foregone interest on the money tie up in the inventory and other cost of maintaining the inventories such as storage cost and store staff salary. Whereas the cost of not having adequate inventories are the lost of contribution through loss of sales, production stoppage, emergency order cost and high reorder cost. Therefore it is important for the organization to strike a balance between inventory holding cost and inventory out cost.
EOQ Methodology
The economic order quantity (EOQ) approach can be regarded as the conventional method
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The estimating department has ascertained the following facts in respect of the work:

* The labour time for the contract would be 1,200 hours.

* The material cost would be £ 9,000 plus the cost of a particular component not normally used in the company’s models.

* These components could be purchased from a supplier for £2,500 or alternatively, they could be made internally for a material cost of £ 1,000 and an additional labour time of 150 hours.

Advise the management as to the action they should take.

In view of its scarcity labour is taken as the limiting factor.
The decision on whether to make or buy the component has to be made before it can be decided whether or not to accept the contract. In order to do this the contribution per labour hour for normal production must first be calculated, as the contract will replace some normal production.

Normal products | Basic | Scientist | | £ | £ | £ | £ | Selling price | | 5.00 | | 7.50 | Materials | 1.25 | | 1.63 | | Labour | 1.50 | | 2.25 |

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