Relevant Costs-Holding cost Holding cost(carrying or inventory cost)-the sum of costs that are proportional to the amount of inventory physically on hand at any point in time. 口 Some items of holding costs: 。 Cost of providing the physical space to store the items; Taxes and insurance; Breakage,spoilage,deterioration,and obsolescence; Opportunity cost of alternative investment;
Relevant Costs- Holding cost Holding cost (carrying or inventory cost)-the sum of costs that are proportional to the amount of inventory physically on hand at any point in time. Some items of holding costs: • Cost of providing the physical space to store the items; • Taxes and insurance; • Breakage, spoilage, deterioration, and obsolescence; • Opportunity cost of alternative investment;
Relevant Costs-Holding cost Opportunity cost,also known as cost of capital,turns out to be the most significant one If we have 10,000RMB on hand,and save it in bank for one month at interest rate 0.25/month,then we may earn 25RMB/month from bank; If we use this amount money to buy some goods and store them in warehouse,then we lose 25RMB/month Holding cost considers the aggregated interest rate comprised of the four components For example,28%cost of capital,2%taxes and insurance,6%cost of storage,1%breakage and spoilage,mean 37%total interest charge. We would assess a charge of 37 cents for every dollar that we have invested during a one-year period
Relevant Costs- Holding cost Opportunity cost, also known as cost of capital, turns out to be the most significant one • If we have 10,000RMB on hand, and save it in bank for one month at interest rate 0.25/month, then we may earn 25RMB/month from bank; • If we use this amount money to buy some goods and store them in warehouse, then we lose 25RMB/month. Holding cost considers the aggregated interest rate comprised of the four components • For example, 28% cost of capital, 2% taxes and insurance, 6% cost of storage, 1% breakage and spoilage, mean 37% total interest charge. • We would assess a charge of 37 cents for every dollar that we have invested during a one-year period
Relevant Costs-Holding cost Holding cost h(in terms of dollars per unit per year) h=Ic I:the annual interest rate c:the dollar value of one unit of inventory For example,an item valued at $180 would have an annual holding cost of h=0.37*180-66.60. Inventory cost fluctuates with time-inventory as a function of time The holding cost incurred at any point in time is proportional to the inventory level at that point in time
Relevant Costs- Holding cost Holding cost h (in terms of dollars per unit per year) • h =Ic • I: the annual interest rate • c: the dollar value of one unit of inventory • For example, an item valued at $180 would have an annual holding cost of h=0.37*180=66.60. Inventory cost fluctuates with time-inventory as a function of time • The holding cost incurred at any point in time is proportional to the inventory level at that point in time
© Relevant Costs-Holding cost E 7=(1o)dt)g,-) Average inventory level during t tot Fig.4-2 Inventory as a Function of Time
Relevant Costs- Holding cost Fig.4-2 Inventory as a Function of Time 2 1 2 1 ( ( ) ) /( ) t t I I t dt t t
Relevant Costs-Order cost It depends on the amount of inventory that is ordered or produced. Two components The fixed cost K:independent of size of order as long as it is not zero;which includes only those costs that are relevant to the current ordering decision,maybe the costs of order generation and receiving,and handling cost;not includes the overhead costs The variable cost c:incurred on per-unit basis; 0 C(x)= 讨x=0
Relevant Costs- Order cost • It depends on the amount of inventory that is ordered or produced. • Two components The fixed cost K: independent of size of order as long as it is not zero; which includes only those costs that are relevant to the current ordering decision, maybe the costs of order generation and receiving, and handling cost; not includes the overhead costs The variable cost c: incurred on per-unit basis; 0 0; ( ) 0 if x C x K cx if x