Question

what are the differences in the application of EOQ to the purchase of scrap steel versus gold for electronic components?

Answer 1

Working Note: For calculating common size analysis of income statement we used sales as a base for calculating percentage of expenses against sales so formula is (expense/Sales)*100 Calculation of Analysis 2016 2015 Particulars Amt       %         Amt            % Total Revenue $41119 100% $40483 100% Expenses Cost of restaurant sales $11127 27.1% $11083 27.4% Restaurant operating expenses $16915 41.1% $16727 41.3% General And Administrative $6827 16.6% $5285 13.1% Advertising $2554 6.2% $2652 6.6% Depreciation and amortization $2228 5.4% $2108 5.2% Impairment of long lived assets $994 2.4% 0 0.0% Total Expenses $40645 98.8% $37855 93.5% operating income $546 1.3% $2628 6.5% Economic order quantity (EOQ) is a decision tool used in cost accounting for calculating optimum reorder point for company, where company is in most economical position, Economic order quantity uses three variables: Annual demand, Per ordering cost, and relevant carrying cost of unit: Demand: The demand, in units, for the product for a specific time period. Relevant ordering cost: Ordering cost per purchase order. Relevant carrying cost: Carrying costs for one unit. Assume the unit is in stock for the time period used for demand. Note that the ordering cost is calculated per order. The carrying costs are calculated per unit. Here’s the formula for economic order quantity: Economic order quantity = square root of [(2 x demand x ordering costs) ÷ carrying costs] That’s easier to visualize as a regular formula: EOQ= A is demand (annual), O is ordering cost (per purchase order), and C is carrying cost per unit. We can apply EOQ for calculating optimum reorder point, but the answer is based on three things 1) Demand for specific period 2) Ordering cost per order 3) Carrying cost per Unit EOQ assume that other things remain same and does not effect the reorder point. So the Difference in the application of EOQ formula in scrap of steel and gold arise only due to variable used for calculating EOQ, Annual Demand : Demand in case of scrap of steel quantity may be higher than the gold Ordering cost: ordering cost in case of steel may be higher than the ordering cost of gold an higher ordering cost may lead to lower frequency of order that means company required an higher level of economical order quantity, Carrying cost: carrying cost per qty of steel may be very low in comparison to higher carrying cost of gold due to its value Higher carrying cost of gold may be lead to lower level EOQ, means an higher frequency of ordering, because storing the gold may incuured much cost in inventory security etc. than to scrap steel which have lower carrying cost,