Question：Compassion Co manufactures Megs. The management has decided to introduce a system of inventory control and in future will only produce batches of Megs of a size determined by the Economic Order Quantity formula.
Megs are stored in a warehouse rented by Compassion Co for $5 per square foot per annum. Space available exceeds current requirements and the surplus can be re-let on annual contracts at $8 per square foot. Each Meg occupies 4 square feet of warehouse space. To produce a Meg incurs variable costs of $20. The manufacture and storage of Megs is financed by a bank overdraft on which interest of 15% per annum is charged.
Compassion Co insures all inventory and pays a premium of 5% of the total average value of inventories to do this.
In the Economic Order Quantity formula what figure should be used for h?
(h is the cost of holding one unit of inventory for one year).
Holding cost of $________
The correct answer is:$68.
解析：Opportunity cost = 4 x $8 = $32
But annual opportunity cost must be based on maximum inventory levels
EOQ based on average inventory; therefore opportunity cost = $64 (32 x 2)
Finance cost = 15% x 20 = $3
Insurance = 5% x 20 = $1
Therefore totalling $68 ($64 + $3 + $1)
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