A given inventory item has a per-year holding cost of $500. One method of shipping this item is three days faster than the other, but it is $2.50 more per unit. Using the slower method would be __________ more expensive overall than using the faster method.

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Quizplus · Accepted Answer

The key to solving this problem is understanding the trade-off between holding costs and shipping costs. The holding cost of $500 per year translates to approximately $1.37 per day ($500/365 days). By choosing the slower shipping method, the company incurs 3 extra days of holding cost, which amounts to $4.11 ($1.37 * 3 days). However, the faster shipping method costs an additional $2.50 per unit. Therefore, the net extra cost of using the slower method is the difference between the extra holding cost and the higher shipping cost of the faster method: $4.11 - $2.50 = $1.61.

A Given Inventory Item Has a Per-Year Holding Cost of $500