Master the ACCA Management Accounting F2 in 2026 – Unleash Your Number-Crunching Power!

To determine the total annual cost of holding inventory, it is essential to understand how the costs are calculated. The total holding cost is generally computed using the formula:

Total Holding Cost = (Average Inventory Level) × (Holding Cost per Unit)

In this case, the manufacturing company uses 25,000 components annually, and with an economic order quantity (EOQ) of 2,000 components, the average inventory level for the EOQ model can be calculated as follows:

1. The average inventory is typically half of the EOQ when it is ordered periodically, which in this instance would be:

- Average Inventory = EOQ / 2 = 2,000 / 2 = 1,000 components.

2. The question does not specify the holding cost per unit, but assuming it ends up aligning with the total annual cost provided, we can deduce that the holding cost per unit would be necessary to reach the total calculated.

Given that the total holding cost must match the figure derived from the annual usage and average inventory, if we end up with $3,000 as the total holding cost, this could imply that the holding cost per unit is $3.

It is important to note that the calculation reflects the idea that higher