L.L.B. sells 86,500 units a year. The average order is for 6,000 units. Each new order arrives just as the old order is being depleted. The company does not hold any safety stock. Each order incurs a fixed cost of $48. The carrying cost of inventory is $2.21 per unit per year. What is the total cost of inventory for one year?

Question

Quizplus · Accepted Answer

The total cost of inventory for one year includes both the ordering cost and the carrying cost. Ordering cost is calculated as (Annual demand / Order size) * Fixed cost per order = (86,500 / 6,000) * $48 = 14.4167 * $48 = $691.20. Carrying cost is calculated as (Order size / 2) * Carrying cost per unit = (6,000 / 2) * $2.21 = 3,000 * $2.21 = $6,630. Total cost = Ordering cost + Carrying cost = $691.20 + $6,630 = $7,321.20, which rounds to $7,322.

LLB Sells 86,500 Units a Year