Calculate the annual holding cost if the economic order quantity is used
To calculate the annual holding cost, you need to know a few key parameters: the economic order quantity (EOQ), the holding cost per unit, and the annual demand.
The formula to calculate the annual holding cost is:
Annual Holding Cost = (EOQ / 2) * Holding Cost per Unit * (Annual Demand / EOQ)
Here's how to calculate the annual holding cost step by step:
1. Determine the Economic Order Quantity (EOQ): The EOQ represents the optimal order quantity that minimizes the total inventory costs. It can be calculated using the EOQ formula:
EOQ = √((2 * Annual Demand * Ordering Cost) / Holding Cost per Unit)
Where:
- Annual Demand: The total quantity required for the year.
- Ordering Cost: The cost of placing each order.
- Holding Cost per Unit: The cost incurred to hold one unit of inventory for a year.
2. Calculate the Annual Holding Cost:
To calculate the annual holding cost, plug in the values you have:
Annual Holding Cost = (EOQ / 2) * Holding Cost per Unit * (Annual Demand / EOQ)
Substitute the known values into the formula and calculate the result.