The annual demand for a product has been projected at 2,000 units.This demand is assumed to be constant throughout the year.The ordering cost is $20 per order, and the holding cost is 20 percent of the purchase cost.Currently, the purchase cost is $40 per unit.There are 250 working days per year.Whenever an order is placed, it is known that the entire order will arrive on a truck in 6 days.Currently, the company is ordering 250 units each time an order is placed.What is the total holding cost for the year using this policy?
A)$400
B)$1,000
C)$1,400
D)$2,000

Question

Quizplus · Accepted Answer

The total holding cost for the year can be calculated using the formula for the average inventory level (which is half the order quantity for constant demand and constant order quantity scenarios) multiplied by the holding cost per unit per year. The order quantity is 250 units, so the average inventory level is 250 / 2 = 125 units. The holding cost per unit is 20% of the purchase cost, which is 20% of $40 = $8 per unit per year. Therefore, the total holding cost for the year is 125 units * $8/unit = $1,000.

The Annual Demand for a Product Has Been Projected at 2,000