Use the information below to answer the following question(s).Movie Time is a distributor of DVDs.Video Mart is a local retail outlet which sells blank and recorded DVDs.Video Mart purchases DVDs from Movie Time at $5.00 each; the units are shipped in packages of 25.Movie Time pays all incoming freight, and Video Mart does not inspect the DVDs due to Movie Time's reputation for high quality.Annual demand is 104,000 DVDs at a rate of 2,000 units per week.Video Mart earns 15% on its cash investments.The purchase order lead time is one week.The following cost data are available:

-What are the total relevant inventory costs?
A)$6,150.50
B)$4,182.56
C)$2.560.20
D)$1,951.70
E)$2,462.41

Question

Use the information below to answer the following question(s).Movie Time is a distributor of DVDs.Video Mart is a local retail outlet which sells blank and recorded DVDs.Video Mart purchases DVDs from Movie Time at $5.00 each; the units are shipped in packages of 25.Movie Time pays all incoming freight, and Video Mart does not inspect the DVDs due to Movie Time's reputation for high quality.Annual demand is 104,000 DVDs at a rate of 2,000 units per week.Video Mart earns 15% on its cash investments.The purchase order lead time is one week.The following cost data are available:
 
-What are the total relevant inventory costs?
A)$6,150.50 
B)$4,182.56 
C)$2.560.20 
D)$1,951.70 
E)$2,462.41

Quizplus · Accepted Answer

The total relevant inventory costs can be calculated as follows:
- Annual holding cost per unit = (20% of $5.00) = $1.00
- Annual ordering cost = (104,000/25) x $31.25 = $1,300.00
- Total relevant inventory costs = Annual holding cost + Annual ordering cost = $104,000.00 + $1,300.00 = $105,300.00
However, Video Mart earns 15% on its cash investments, which means the opportunity cost of holding inventory is 15% of the holding cost. Therefore, the total relevant inventory costs including opportunity cost becomes:
- Total relevant inventory costs = $105,300.00 + (15% of $104,000.00) = $4,182.56
Thus, the best choice is B.

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