What was the additional average annual cost of holding

Reference no: EM131783950

A manager at The XYZ Company became very enthusiastic about using EOQ to plan the sizes of his raw material purchases and instituted lot sizing based on EOQ values before he could properly estimate costs. For one particular raw material for a production line, that had an annual demand of 1,800 units and which was valued at $2.40 per unit, he assumed a holding cost based on a 30 percent annual interest rate and a setup cost of $100. Some time later, after the cost accounting department had time to perform an analysis, it was found that an appropriate value of the interest rate was closer to 20 percent and the setup cost about $40. What was the additional average annual cost of holding and setup incurred because of the use of the wrong costs?

Reference no: EM131783950

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