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Bakers & Sweets Plc are known for brownies for which raising agent is required. Annual demand of raising agent is 20,000 kilograms. The demand is considerably even through the year. The cost to place each order is Rs. 50 where is cost to hold one kilo of raising agent is Rs. 2. If each order is of 3,000 units and buffer stock is maintained at 1,000 units around the year then
What is the combined total annual costing of holding and ordering the raising agent
the answer is 404500.
I could not figure it out.can u plz explain sir.This question is nothing to do with ‘cost classification’ – it is a question on inventory control (have you watched the free lecture on this?).
The number of orders per year is 20,000 / 3000 = 6.67, and so the total order cost per year is 6.67 x 50 = 333.
The average inventory is 3,000 / 2 = 1,500 plus the buffer/safety inventory of 1,000 = 2,500 kg and so the total holding cost is 2,500 x 2 = 5,000.
So the total annual cost is 5,333.
The answer is certainly not 404,500! Either your book as it wrong, or you have mistyped the question. (I am assuming that each unit required 1 kg because there is no other information. Are you sure the question does not tell you how many kg each unit needs?)
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