Can anybody please explain why do we consider the interest element in calculating the Economic Order Quantity ?
Thank you and regards.
1 Replies
CS Bijoy
(Expert)
(6394 Points)
Replied 13 September 2011
If you had to borrow money to pay for your inventory, the interest rate would be part of the carrying cost. If you did not borrow on the inventory, but have loans on other capital items, you can use the interest rate on those loans since a reduction in inventory would free up money that could be used to pay these loans
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