Specialty Manufacturing requires 5400 gadgets per year for production. The firm decides to order 120 gadgets at a time. The costs of ordering are $50 per order and carrying costs per gadget are $2. The annual cost of the inventory policy is:

Question

Quizplus · Accepted Answer

The annual cost of the inventory policy is the sum of the ordering costs and the carrying costs. The ordering costs are $50 per order, and the firm orders 120 gadgets at a time. So, the annual ordering costs are $50 * (5400/120) = $2250. The carrying costs are $2 per gadget, and the firm carries an average of 120/2 = 60 gadgets in inventory. So, the annual carrying costs are $2 * 60 = $120. The total annual cost of the inventory policy is $2250 + $120 = $2370.

Specialty Manufacturing Requires 5400 Gadgets Per Year for Production