The time value of money, opportunity cost, is not part of the calculation of EOQ holding cost (T/F)

Step 1: Break Down the Problem

To determine whether the statement is true or false, we need to analyze the concepts involved:

1. Time Value of Money: Understanding what it involves.
2. Opportunity Cost: How it relates to capital tied up in inventory.
3. EOQ Holding Cost: Definition and components involved in its calculation.

Step 2: Relevant Concepts

1. Time Value of Money: This refers to the concept that money available now is worth more than the same amount in the future due to its potential earning ability.
2. Opportunity Cost: This is the cost of an alternative that must be forgone in order to pursue a certain action. In terms of inventory, it often accounts for the monetary value of capital that is invested in holding inventory rather than being used elsewhere.
3. EOQ (Economic Order Quantity): This model calculates the optimal order quantity that minimizes total inventory costs, which includes holding costs, ordering costs, and sometimes stockout costs.

Step 3: Analysis and Detail

• Holding costs typically include expenses such as storage, insurance, depreciation, and opportunity costs.
• Opportunity cost arises from the money tied up in inventory and represents the foregone potential earnings from that capital if it were invested elsewhere.
• The holding cost in the EOQ formula may not explicitly mention opportunity cost, but it does implicitly include it since the money used to purchase inventory could have otherwise been invested.

Step 4: Verify and Summarize

Given the interconnectedness of opportunity cost and capital associated with inventory, the statement that "opportunity cost is not part of the calculation of EOQ holding cost" is false.

Final Answer

False. Opportunity cost is indeed a component of the holding cost in the context of EOQ calculations.