Under EOQ in the mountain bikes scenario, what is the annual holding cost component?

• A. $1,000
• B. $2,400
• C. $12,000
• D. $24,000

Answer: (B)

Under EOQ, the annual holding cost comes from the amount you have sitting in inventory on average, times the cost to hold one unit for a year. With steady demand and fixed-order quantities, inventory swings from 0 up to the order quantity, so the average on-hand is half of the order quantity. The formula is the holding rate per unit per year (h) times the average inventory: 0.5 × h × Q.

In the mountain bikes scenario, using the given holding-cost rate per bike per year and the EOQ, this calculation yields two thousand four hundred dollars as the annual holding cost component. This reflects paying storage and related costs on about half of the annual order quantity throughout the year. Other amounts would require different values for the order quantity or the holding rate than those provided in the scenario.