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
E)None of the above

Question

Quizplus · Accepted Answer

The annual holding cost can be calculated using the formula:

Annual holding cost = (average inventory level) x (holding cost per unit)

To find the average inventory level, we need to first calculate the order quantity and the number of orders placed per year.

Total demand = 7,500 units
Order quantity = 500 units
Number of orders per year = (Total demand) / (Order quantity) = 7,500 / 500 = 15 orders

Now, we can calculate the average inventory level:

Average inventory level = (Order quantity) / 2 = 500 / 2 = 250 units

The holding cost per unit is 10% of the purchase cost, which is $48:

Holding cost per unit = 0.1 x $48 = $4.80

Therefore, the annual holding cost is:

Annual holding cost = (average inventory level) x (holding cost per unit) 
= 250 x $4.80 = $1,200

So the best choice for the total annual holding cost is B, $1,200.

RCBarker Makes Purchasing Decisions for His Company