Jones Manufacturing Inc.purchases a component from a Chilean supplier.The demand for that component is exactly 70 units each day.The company is open for business 250 days each year.When the company reorders the product,the lead time from the supplier is exactly 10 days.The product costs $14.00.The company determined that its inventory carrying cost is 20 percent.The company's order cost is $30.00.If the company decides to order 1,750 units each time it places an order,what will be the total annual cost of this policy? (Do not include the product cost in your answer.)

Question

Quizplus · Accepted Answer

First, we need to calculate how many orders will be placed in a year:
Annual demand = 70 units/day x 250 days/year = 17,500 units/year
Order quantity = 1,750 units/order
Number of orders = 17,500 units/year ÷ 1,750 units/order = 10 orders/year

Now, we can calculate the total annual cost:
Ordering cost = $30.00/order x 10 orders/year = $300.00/year
Annual inventory carrying cost = (average inventory level) x (inventory carrying cost rate)
To calculate the average inventory level, we need to know the time between orders, which is the reorder point (lead time demand) plus safety stock. Let's assume a safety stock of 0 units for this calculation:
Reorder point = lead time demand = 70 units/day x 10 days = 700 units
Average inventory level = (order quantity ÷ 2) + reorder point = (1,750 units/order ÷ 2) + 700 units = 1,075 units
Inventory carrying cost rate = 20%
Annual inventory carrying cost = average inventory level x inventory carrying cost rate = 1,075 units x 20% = $215.00/year

Total annual cost = ordering cost + annual inventory carrying cost = $300.00/year + $215.00/year = $515.00/year

Therefore, the best choice is C.