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

First find the number of orders per year:
86,500 units/year ÷ 6,000 units/order = 14.4 orders/year
Since each order arrives just as the old order is depleted, we know there are 14 orders per year.

Next, find the total ordering cost for the year:
14 orders/year × $48/order = $672/year

Next, find the average inventory level:
6,000 units/order ÷ 2 = 3,000 units
So, on average, there are 3,000 units in inventory.

Finally, find the total carrying cost for the year:
3,000 units × $2.21/unit/year = $6,630/year

Add the ordering cost and carrying cost to find the total inventory cost:
$672/year + $6,630/year = $7,302/year, which rounds to $7,322/year.

LLB Sells 86,500 Units a Year