Volume transportation rate: In the EOQ formulation, there was no consideration for the impact of transportation cost on order quantity. The transportation cost from the origin to the inventory depot is incurred by the seller. However if the ownership is transferred at the origin, the impact of the transportation rates on the total cost must be considered when determining the order quantity. As a general rule, greater the quantity, lesser will be the volume transportation rate because many sellers tend to give a discount when the goods are bought in a larger size (both by the truck and rail). Thus all other things being equal, an enterprise will want to buy goods in large quantities to maximize transportation economies. Such quantity may be larger than the actual quantity determined by EOQ. Increasing the size of the order has a two fold impact on the inventory:
- Â It increases the inventory carrying cost
- It provides better transportation economies.
Finally, two factors regarding inventory cost under costs of origin purchase are:
- The transit inventory is a part of the enterprise’s average inventory and therefore subjected to an appropriate charge.
- The transportation cost should be added to the price of the goods purchased to assess the value of the goods tied up in inventory. Thus the inventory carrying cost should be assessed on the combined cost of the item and transportation.
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