Chapter 3: Working Capital (Inventory)

Question 1

What is Economic Order Quantity?
Formula given in the exam

Answer 1

EOQ=√(2CoD/Ch)
Co=Cost of placing one order
D=Demand per annum
Ch=Cost of holding one unit for one year

EOQ model identifies the optimal order quantity in order to minimise the total annual inventory costs.
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Question 2

Annual holding cost

Answer 2

Ch x q/2

q being quantity ordered
Ch - holding cost per unit

Question 3

Annual order cost

Answer 3

Co x D/q

Co = Order cost per order
D=Annual demand
q being quantity ordered

Question 4

Total annual cost (TAC)

Answer 4

TAC = (Co * D/Q) + Ch(B+Q/2)
B = buffer stock held

If there is no buffer stock, the THC and TOC will be the same

Question 5

Just in time

Answer 5

Helps to reduce inventory levels to their absolute minimum by only producing an item when a customer requires it.

JIT purchasing helps reduce inventory levels to their absolute minimum by only taking delivery of raw materials when required for production.

This requires a close working relationship with (local) suppliers, a quick production process and flexible staff.