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One more question:
A company purchases 5000 units per quarter at an even rate throughout the year.
Each order places with the supplier incurs a delivery charge of $20
The annual cost of holding one unit in inventory is $5
What is the minimum total of the inventory costs (order costs + holding costs) per year?My workings:
Re-order costs = 4 x 20 = 80
holding costs = 5000/2 x 5 = 12500
Inventory costs = 80 + 12500 = 12580But the correct answer is 2000
Thank you
The question does not say that they purchase 5000 a quarter – it says that they use 5000 a quarter.
To get minimum cost, you need to calculate the economic order quantity (with a demand of 20,000 a year) and then calculate the cost.
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