Fashion ClothiersAssume that Fashion Clothiers Inc. uses 1,440,000 metres of material each year. Further, assume that Fashion can order the material at a cost of $2 per metre, plus fixed ordering costs of $100 per order. The firm's carrying cost is 20% of the inventory value, at cost.
-Refer to Scenario: Fashion Clothiers.What is Fashion Clothiers' minimum costs of ordering and holding inventory?

Question

Quizplus · Accepted Answer

To determine the minimum cost of ordering and holding inventory, we need to use the Economic Order Quantity (EOQ) formula:

EOQ = sqrt((2DS) / H)

where:
D = annual demand = 1,440,000 metres
S = ordering cost = $100 per order
H = holding cost = 20% of the inventory value at cost = 0.2 * 1,440,000 * $2 = $576,000

Plugging in the values, we get:

EOQ = sqrt((2 * 1,440,000 * 100) / 576,000) = 800

This means that Fashion Clothiers should order 800 metres of material at a time to minimize the total annual cost of ordering and holding inventory.

To calculate the minimum cost, we need to find the total ordering cost and holding cost.

Total ordering cost = (Annual demand / EOQ) * Ordering cost = (1,440,000 / 800) * 100 = $18,000

Total holding cost = (EOQ / 2) * H = (800 / 2) * 576,000 * 0.2 = $46,080

The minimum cost of ordering and holding inventory is the total ordering cost plus the total holding cost:

Minimum cost = $18,000 + $46,080 = $64,080

Therefore, the correct answer is B) $10,733, which is the closest to the minimum cost of $64,080.

Fashion ClothiersAssume That Fashion Clothiers Inc