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Business valuations and market efficiency

Question 2

EOQ

Annual demand for a product is 100,000 units. The purchase price is $10 per
unit and the company’s cost of finance is 20% per annum. Other holding costs
of inventory total $0.50 per unit per month. Ordering costs are $125 each time
an order is made.

Calculate the EOQ.

D = 100,000 per annum

Co = $125

Ch = $0.50 × 12 + $10 × 20% = $8 per unit per annum.

EOQ = √(2 × $125 × 100,000/$8) = 1,768 units per order.

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