Question

Southern Hydraulic Supply is undertaking a review of their inventory policies. A typical product is a small hydraulic fitting. Currently, Southern orders 1,000 of these fittings at a time from their supplier. The demand for the fittings is 52,000 per year, the ordering cost is $50 per order, and the cost to hold one fitting in inventory for one year is $1.25. Each unit costs $8. What is the total annual cost of Southern’s current inventory policy? Group of answer choices $2039 $300,000 $418,550 $419,225

Answer 1

$418,550

Step-by-step explanation:

Steps are shown below:

a. The computation of the economic order quantity is shown below:

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

=
`\sqrt{\frac{2* \text{52,000}* \text{\$50}}{\text{\$1.25}}}`

= 2,040 units

b. The number of orders would be equal to

= Annual demand ÷ economic order quantity

= $52,000 ÷ 2,040 units

= 25.49 orders

c. The average inventory would equal to

= Economic order quantity ÷ 2

= 2040 units ÷ 2

= 1,020 units

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

Ordering cost = Number of orders × ordering cost per order

= 25.49 orders × $50

= $1,275

Carrying cost = average inventory × carrying cost per unit

= 1,020 units × $1.25

= $1,275

So, the total annual cost would be

= Purchase cost + ordering cost + carrying cost

= $416,000 + $1,275 + $1,275

= $418,550

Purchase cost = Annual demand × cost per unit

= 52,000 × $8

= $416,000