Question

Victor sells a line of upscale evening dresses in his boutique. He charges $300 per dress, and sales average 30 dresses per week. Currently, Victor orders a 10-week supply at one time from the manufacturer. He pays $150 per dress, and it takes 2 weeks to receive each delivery. Victor estimates his administrative cost of placing each order at $225. Because he estimates his cost of capital at 20%, each dollar's worth of idle inventory costs him $0.20 per year.

Q: Compute Victor's total annual cost of ordering and carrying inventory

Answer 1

Victor's total annual cost of ordering and carrying inventory is $5625 which includes $1125 in ordering costs and $4500 in carrying costs.

Step-by-step explanation:

To compute Victor's total annual cost of ordering and carrying inventory, we need to calculate the ordering costs and the carrying costs for the inventory.

Ordering Cost: Victor orders a 10-week supply at one time, and his sales average 30 dresses per week. therefore, he places a total of (52 weeks / 10 weeks) = 5.2 orders per year (rounded to the nearest whole order, that's 5 orders per year). The administrative cost of placing each order is $225, making the total annual ordering cost 5 orders * $225/order = $1125. carrying Cost: Victor orders 300 dresses at a time (30 dresses/week * 10 weeks) and pays $150 per dress. The cost of capital is 20%, so the carrying cost per dollar per year is $0.20. the average inventory level is half the order size (since inventory depletes linearly over the order period), which is 150 dresses. yhe carrying cost per dress per year is $150/dress * 20% = $30. Thus, the total carrying cost for the year is 150 dresses * $30/dress = $4500.

Adding the ordering and carrying costs together, the total annual cost of ordering and carrying inventory for Victor is $1125 + $4500 = $5625.