Fashion Clothiers Inc.
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.
-Refer to Fashion Clothiers Inc.What is Fashion Clothiers' minimum cost of ordering and holding inventory?

Question

Quizplus · Accepted Answer

The minimum cost of ordering and holding inventory can be found using the Economic Order Quantity (EOQ) model. The EOQ formula is $\sqrt{\frac{2DS}{H}}$, where $D$ is the demand (1,440,000 yards), $S$ is the ordering cost ($100 per order), and $H$ is the holding cost per unit per year (20% of $2 = $0.40). Plugging in the values, we get:EOQ = $\sqrt{\frac{2 * 1,440,000 * 100}{0.40}}$ = $\sqrt{720,000,000}$ = 26,832.81 yards per order.The total cost (TC) at EOQ includes ordering cost and holding cost, which can be calculated as:Ordering cost = $\frac{D}{Q} * S$ = $\frac{1,440,000}{26,832.81} * 100$.Holding cost = $\frac{Q}{2} * H$ = $\frac{26,832.81}{2} * 0.40$.Adding both gives us the minimum total cost:Ordering cost = $\frac{1,440,000}{26,832.81} * 100$ ≈ $5,366.56.Holding cost = $\frac{26,832.81}{2} * 0.40$ ≈ $5,366.56.Minimum total cost = Ordering cost + Holding cost ≈ $5,366.56 + $5,366.56 = $10,733.12.Therefore, the minimum cost of ordering and holding inventory for Fashion Clothiers Inc. is approximately $10,733, which matches choice B.

Fashion Clothiers Inc. Assume That Fashion Clothiers Inc. Uses 1,440,000 Yards of Material