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1. EOQ aims to minimize the costs which are relevant to ordering and holding inventory.
- Total holding cost=EOQ/2*Ch
- Total ordering cost=Co*D/EOQ
- Assumptions for EOQ
•Demand and lead time are constant and known
•Purchase price is constant
•No buffer inventory held (not needed)
-Total cost=Ordering cost+ Holding cost+ Purchase cost (if have quantity discount, ie., purchase is not constant)
2. Reorder level
Reorder level=Demand in the lead time
Reorder level discuss when to order.
3. Reasons for holding cash
•Transactions motive
Cash required to meet day to day expenses.
•Precautionary motive
Cash held to give a cushion against unplanned expenditure.
•Speculative motive
Cash kept available to take advantage of market investment opportunities.
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