Which of the following equations determines the total annual carrying costs when no safety stock is kept?
A)Cost of placing an order * Order quantity
B)Cost of placing an order * Number of orders per year
C)Cost of placing an order * One-half of the order quantity
D)Unit carrying costs per year * One-half of the order quantity

Question

Which of the following equations determines the total annual carrying costs when no safety stock is kept?
A)Cost of placing an order * Order quantity
B)Cost of placing an order *  Number of orders per year
C)Cost of placing an order *  One-half of the order quantity
D)Unit carrying costs per year * One-half of the order quantity

Quizplus · Accepted Answer

The equation for total annual carrying costs when no safety stock is kept is determined by the unit carrying costs per year multiplied by one-half of the order quantity. This is because, without safety stock, the inventory level will fluctuate between zero and the order quantity, with an average inventory level of one-half of the order quantity. Therefore, the carrying cost is only applied to the average inventory level, which is one-half of the order quantity. Choice D is the only option that includes the unit carrying costs per year and one-half of the order quantity.

Which of the Following Equations Determines the Total Annual Carrying