Figure 24-4
Buckner Manufacturing purchases components produced by Cochran Company in the manufacture of their main product. For the next year, Buckner expects to use a total of 30,000 parts. Buckner typically orders 500 units at a time. The cost of placing an order is £40, and the average annual cost of carrying one unit of inventory is £2.
-Refer to Figure 24-4. Buckner's total inventory cost is
A)£2,900.
B)£1,000.
C)£3,400.
D)£2,000.

Question

Quizplus · Accepted Answer

The total inventory cost is the sum of the ordering cost and the carrying cost. The ordering cost is £40 per order, and Buckner expects to place 60 orders (30,000 parts / 500 parts per order). The carrying cost is £2 per unit per year, and Buckner expects to carry an average of 250 units (500 units / 2). Therefore, the total inventory cost is £40 x 60 + £2 x 250 = £2,900.

Figure 24-4 Buckner Manufacturing Purchases Components Produced by Cochran Company in the in the Manufacture