Answer the following questions using the information below:
Short Grass Incorporated is a distributor of golf balls. Martin's Golf Supplies is a local retail outlet which sells golf balls. Martin's purchases the golf balls from Short Grass Incorporated at $0.75 per ball; the golf balls are shipped in cartons of 72. Short Grass Incorporated pays all incoming freight, and Martin's Golf Supplies does not inspect the balls due to Short Grass' reputation for high quality. Annual demand is 155,520 golf balls at a rate of 2,991 balls per week. Martin's Golf Supplies earns 12% on its cash investments. The purchase-order lead time is one week. The following cost data are available:

-If Martin's makes an order (1/12 of annual demand)once per month, what are the relevant total costs?
A)$1,500
B)$652.50
C)$2,152.50
D)$3,000.00

Question

Answer the following questions using the information below:
Short Grass Incorporated is a distributor of golf balls. Martin's Golf Supplies is a local retail outlet which sells golf balls. Martin's purchases the golf balls from Short Grass Incorporated at $0.75 per ball; the golf balls are shipped in cartons of 72. Short Grass Incorporated pays all incoming freight, and Martin's Golf Supplies does not inspect the balls due to Short Grass' reputation for high quality. Annual demand is 155,520 golf balls at a rate of 2,991 balls per week. Martin's Golf Supplies earns 12% on its cash investments. The purchase-order lead time is one week. The following cost data are available:
 
-If Martin's makes an order (1/12 of annual demand)once per month, what are the relevant total costs?
A)$1,500 
B)$652.50 
C)$2,152.50 
D)$3,000.00

Quizplus · Accepted Answer

The relevant total costs include both ordering and holding costs. Since Martin orders once per month, the ordering cost is 12 times the cost per order. The holding cost is based on the average inventory level, which is half of the order quantity. The total cost is the sum of these two components.

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