Question

Which of the following is the set of all cost components that make up the fixed-order quantity total cost (TC) function?a. Annual holding cost, annual ordering cost, unit costb. Annual holding cost, annual ordering cost, annual purchasing costc. Annual lead time cost, annual holding cost, annual purchasing costd. Annual purchasing cost, annual ordering cost, fixed coste. Annual unit cost, annual set up cost, annual purchasing cost

Answer 1

b. Annual holding cost, annual ordering cost, annual purchasing cost

Step-by-step explanation:

The fixed order quantity total cost function is an economic order quantity model which comprises of annual holding cost, annual ordering cost and the purchasing cost

The formula to compute economic order quantity is shown below:

=
`\sqrt{\frac{2* \text{Annual demand}* \text{Ordering cost}}{\text{Carrying cost}}}`

The number of orders would be equal to

= Annual demand ÷ economic order quantity

The average inventory would equal to

= Economic order quantity ÷ 2

d. The total cost of ordering cost and carrying cost equals to

Ordering cost = Number of orders × ordering cost per order

Carrying cost = average inventory × carrying cost per unit

Purchasing cost = Annual demand × price per unit

Thus, the b option is correct