Assume that Fashion Clothiers Inc. uses 1,440,000 yards of material each year. Further, assume that Fashion can order the material at a cost of $2 per yard, plus fixed ordering costs of $100 per order. The firm's carrying cost is 20 percent of the inventory value, at cost.
-What is Fashion Clothiers' minimum costs of ordering and holding inventory?

Question

Quizplus · Accepted Answer

First, we need to compute the optimal order quantity using the economic order quantity (EOQ) formula:

EOQ = sqrt((2DS)/H)

Where:
D = Annual Demand = 1,440,000 yards
S = Ordering Cost = $100 per order
H = Holding cost = 20% of inventory value = 20% x 2 x $2 = $0.80

EOQ = sqrt((2 x 1,440,000 x 100)/0.80) = 15,000

Next, we can compute the total cost of ordering and holding inventory using the following formula:

Total Cost = (D/Q)S + (Q/2)H

Where:
Q = EOQ = 15,000
S = Ordering Cost = $100 per order
H = Holding cost = 20% of inventory value = 20% x 2 x $2 = $0.80
D = Annual Demand = 1,440,000

Total Cost = (1,440,000/15,000) x $100 + (15,000/2) x $0.80 = $9,600 + $6,000 = $15,600

Therefore, the minimum costs of ordering and holding inventory for Fashion Clothiers Inc. is $10,733 (rounded off to the nearest dollar).

Assume That Fashion Clothiers Inc