Faculty of business department of accounting an assessment of fixed asset managementin the

Carrying Costs: 
carrying costs include interest on funds tied up in inventory and the cost of 
warehouse space, insurance premiums, and material handling expenses. There is also an implicit 
cost associated with the dangers of obsolescence and rapid price change. The larger the order we 
place, the greater the average inventory we will have on hand, and the higher the carrying cost. 
Ordering Costs: 
As a second factor, we must consider the cost of ordering and processing 
inventory in to stock. If we maintain a relatively low average inventory in stock, we must order 
many times and total ordering cost will be high.Stanley Block and Geoffrey A. Hart (2009:109)
A. Economic Order Quantity
The question becomes, how do we mathematically determine the minimum total cost amount? 
We may use the following formula as the first step.EOQ is the economic ordering quantity, the 
most advantageous amount for the firm to order each time. We will determine this value, 
translate it into average inventory size, and determine the minimum total cost amount. The terms 
in EOQ formula are defined as follows: Stanley Block and Geoffrey A. Hart (2009:120)
S= Total sales in Units 
O= Ordering cost for each order 
C= Carrying cost per unit in dollars
B.
 Safety Stock and Stock outs
In our analysis we have assumed we would use inventory at a constant rate and we would receive 
new inventory when the old level of inventory reached zero. We have not specifically the
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problem of being out of stock. A stock out occurs when a firm is out of a specific inventory item 
and is unable to sell or deliver the product. The risk of losing sales to a competitor may cause a 
firm to hold a safety stock to reduce this risk. Although the company may use the EOQ model to 
determine the optimum order quantity, management cannot always assume the delivery 
schedules of suppliers will be constant or assure delivery of new inventory when inventory 
reaches zero. A safety stock will guard against late deliveries due to weather, production delays, 
equipment breakdowns, and the many other things that can go wrong between the placement of 
an order and its delivery ( Stanley and Geoffrey, 2009; 120).
A minimum safety stock will increase the cost of inventory because the carrying cost will rise. 
This cost should be offset by eliminating lost profits on sales, due to stock outs and also by 
increased profits from unexpected orders that can now be filled.
The amount of safety stock that a firm carries is likely to be influenced by the predictability of 
inventory usage and the time period necessary to fill inventory orders. The following discussion 
indicates safety stock may be reduced in the future.