A restaurant currently uses 62,500 boxes of napkins each year at a constant daily rate.The cost to order napkins is $200.00 per order and the annual carrying cost for one box of napkins is $1.00.If the restaurant orders the economic order quantity then the total annual inventory cost for napkins is
A)$62,500.
B)$5,000.
C)$2,500.
D)$1,250.

Question

Quizplus · Accepted Answer

First, we need to calculate the economic order quantity (EOQ) using the formula:

EOQ = √((2DS)/H)

where:
D = demand per year = 62,500 boxes
S = cost per order = $200
H = holding cost per unit per year = $1

Plugging in the values, we get:

EOQ = √((2*62,500*200)/1) = √(25,000,000) = 5,000

Next, we calculate the total annual inventory cost using the formula:

Total Annual Inventory Cost = Annual Ordering Cost + Annual Carrying Cost

Annual Ordering Cost = (Total Orders per Year) x (Cost per Order) = (Demand per Year) / (Order Quantity) x (Cost per Order)

Annual Ordering Cost = (62,500/5,000) x $200 = $2,500

Annual Carrying Cost = (Average Inventory Level) x (Holding Cost per Unit per Year) = (Order Quantity/2) x (Holding Cost per Unit per Year)

Annual Carrying Cost = (5,000/2) x $1 = $2,500

Total Annual Inventory Cost = $2,500 + $2,500 = $5,000

Therefore, the best choice is B, as it represents the total annual inventory cost for ordering the economic order quantity.

A Restaurant Currently Uses 62,500 Boxes of Napkins Each Year