What are the minimum total costs of carrying and ordering inventory for a firm that sells 1,500 units with a carrying cost of $2 per unit and places orders in lots of 100?

Question

Quizplus · Accepted Answer

To find the minimum total cost, we need to calculate the ordering cost and add it to the carrying cost.

Ordering cost = (Number of orders placed) x (Fixed cost per order) = (1500/100) x ($200) = $300

Total carrying cost = $100

Total cost = Ordering cost + Carrying cost = $300 + $100 = $400

Since orders are placed in lots of 100, we cannot reduce the ordering cost further. However, we can reduce the carrying cost by reducing the average inventory. This can be achieved by ordering more frequently in smaller lots, but that will increase the ordering cost. Therefore, the given order size of 100 units is the best choice with the minimum total cost of $400.

What Are the Minimum Total Costs of Carrying and Ordering