The Operations Manager for Shadyside Savings & Loan orders cash from her home office for her very popular "BIG BUCKS" automated teller machine, which only dispenses $100 bills. She estimates that this machine dispenses an average of 12,500 bills per month, and that carrying a bill in inventory costs 10 percent of its value annually. She knows that each order for these bills costs $300 for clerical and armored car delivery costs, and that order lead time is six days. Assuming a 30-day month, if she were to order 6,000 bills at a time, what would be the dollar value of the average inventory level?
A)$3,000
B)$6,000
C)$12,500
D)$300,000
E)$600,000

Question

Quizplus · Accepted Answer

The average inventory level, when ordering 6,000 bills at a time, is half of the order quantity because inventory levels drop to zero before replenishing back to the order quantity. Therefore, the average inventory level is 3,000 bills. Since each bill is worth $100, the dollar value of the average inventory level is 3,000 bills * $100/bill = $300,000.

The Operations Manager for Shadyside Savings & Loan Orders Cash