Haulsee Inc. builds 800,000 golf carts a year and purchases the electronic motors for these carts for $370 each. Ordering costs are $540, and Haulsee's inventory carrying costs average 14% of the inventory value. What is the total inventory costs?

Question

Quizplus · Accepted Answer

The total inventory costs can be calculated as:

Total inventory costs = (ordering costs * annual demand/order quantity) + (carrying costs per unit * average inventory level)

We can calculate the order quantity using the Economic Order Quantity (EOQ) formula:

EOQ = sqrt((2 * annual demand * ordering costs)/carrying costs per unit)

In this case, annual demand is 800,000 golf carts, ordering costs are $540, and carrying costs per unit are 14% of $370, which is $51.80.

EOQ = sqrt((2 * 800,000 * 540)/51.80) = 3,992

This means that Haulsee should order 3,992 electronic motors each time.

The annual ordering cost can then be calculated as:

Annual ordering cost = (annual demand/EOQ) * ordering costs = (800,000/3,992) * 540 = $107,751.50

The average inventory level can be calculated as:

Average inventory level = EOQ/2 = 3,992/2 = 1,996

The annual carrying cost can then be calculated as:

Annual carrying cost = carrying costs per unit * average inventory level * annual demand = $51.80 * 1,996 * 800,000 = $82,540,800

Therefore, the total inventory costs are:

Total inventory costs = $107,751.50 + $82,540,800 = $82,648,551.50

Rounding to the nearest dollar, the answer is C) $211,554.