A company has collected the following inventory data for an item. What is the total annual cost for this item? $\begin{array}{llcc}
\text { Annual demand for the item } & \text {D=500}\
\text { Unit purchase cost for the item } &\text {C=10}\
\text { Fixed cost of placing an order } &\text {S=20}\
\text { Cost of holding one unit in inventory for a year } &\text {i=30\%}\
\text { Order quantity } &\text {Q=50}\
\end{array}$

A) 275
B) 450
C) 5,275
D) 5,450

Question

A company has collected the following inventory data for an item. What is the total annual cost for this item? $\begin{array}{llcc}
  \text { Annual demand for the item } & \text {D=500}\
 \text { Unit purchase cost for the item  } &\text {C=10}\
 \text { Fixed cost of placing an order  } &\text {S=20}\
 \text { Cost of holding one unit in inventory for a year  } &\text {i=30\%}\
 \text {  Order quantity } &\text {Q=50}\
\end{array}$

A) 275
B) 450
C) 5,275
D) 5,450

Quizplus · Accepted Answer

The total annual cost is the sum of the ordering cost and the holding cost. The ordering cost is the fixed cost of placing an order multiplied by the number of orders per year. The holding cost is the cost of holding one unit in inventory for a year multiplied by the average inventory level. The average inventory level is equal to half of the order quantity.Ordering cost = S * (D/Q) = 20 * (500/50) = 200Holding cost = i * C * (Q/2) = 0.3 * 10 * (50/2) = 75Total annual cost = Ordering cost + Holding cost = 200 + 75 = 275

A Company Has Collected the Following Inventory Data for an Item