R.C.Barker makes purchasing decisions for his company.One product that he buys costs $50 per unit when the order quantity is less than 500.When the quantity ordered is 500 or more, the price per unit drops to $48.The ordering cost is $30 per order and the annual demand is 7,500 units.The holding cost is 10 percent of the purchase cost.If R.C.orders 500 units each time he places an order, what would the total annual holding cost be?
A)$450
B)$1,200
C)$1,250
D)$2,400

Question

Quizplus · Accepted Answer

To find the total annual holding cost, we need to first calculate the average inventory level.

Average inventory level = (Order quantity/2) + Safety stock

Since there is no mention of a safety stock, we can assume it to be zero.

Average inventory level = (500/2) = 250 units.

Now, let's find the holding cost per unit:

Holding cost per unit = Purchase cost x Holding cost rate 
Holding cost per unit = $48 x 0.10 = $4.80

Total annual holding cost = Average inventory level x Holding cost per unit 
Total annual holding cost = 250 x $4.80 = $1,200

Therefore, the best choice is B, with a total annual holding cost of $1,200.

RCBarker Makes Purchasing Decisions for His Company