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A manufacturing company uses 25000 components of an even rate during a year. Each order placed with the supplier of the components is for 2000 components, which is the economic order quantity. The company holds a buffer inventory of 500 components. The annual cost of holding one component in inventory is $2.
What is the total amount of holding inventory of the component ?
A. $2000
B. $2500
C. $3000
D. $4000How is the answer “$3000”, sir can you explain me, please? I’ve got $2500
The average inventory is 2,000/2 = 1,000 plus that buffer/safety inventory of 500. So a total of 1,500 units.
Therefore the total holding cost is 1,500 x $2 = $3,000 per year.
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