9.11 The Inverse Relationship between Opportunity and Transaction Costs
Once again, transaction and opportunity costs are inversely related. This makes calculating the optimal order quantity problematic. In order to understand the inverse nature of the relationship more clearly, let’s see what happens to the total cost of holding cash, given alternative cash ordering levels. Complete the table below utilizing the given data.
Given:
T = Total required yearly outlay = $25,000,000 (yearly)
F = $100
i = .05
C = variable
Total Cost = Transaction + Opportunity Costs = (T/C × F) + (C/2 × i)
| Order Quantity (C) | Total Cost (TC) |
| $600,000 | |
| $500,000 | |
| $400,000 | |
| $300,000 | |
| $200,000 | |
| $100,000 |