Unformatted text preview: e firm’s average inventory. The average inventory is the order
quantity divided by 2 (Q/2), because inventory is assumed to be depleted at a
constant rate. Thus carrying cost can be expressed as follows:
Carrying cost
total cost of inventory
The sum of order costs and
carrying costs of inventory. Hint The EOQ calculation
helps management minimize the
total cost of inventory.
Lowering order costs will cause
an increase in carrying costs
and may increase total cost.
Likewise, a decrease in total
cost may result from reduced
carrying costs. The goal,
facilitated by using the EOQ
calculation, is to lower total
cost. reorder point
The point at which to reorder
inventory, expressed as days of
lead time daily usage. C Q/2 (14.5) The firm’s total cost of inventory is found by summing the order cost and the
carrying cost. Thus the total cost function is
Total cost (O S/Q) (C Q/2) (14.6) Because the EOQ is defined as the order quantity that minimizes the total cost
function, we must solve the total cost function for the...
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 Fall '13
 Finance, Management, Working Capital, Current Assets, cash conversion cycle, Current Assets Management

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