Question

Andy owns a luxury car dealership. He buys his inventory from the manufacturer, then sells to the public. He’s considering his inventory approach. The manufacturer charges Andy a small transaction fee for each unit he buys from them (as inventory for him to sell to customers); however, interest rates have risen sharply and the interest costs on his Line of Credit are expensive. Andy should:

Group of answer choices

1. Buy many cars from the manufacturer because the order cost is low & holding cost is high

2. Buy few cars from the manufacturer because the order cost is high & holding cost is low

3. Buy few cars from the manufacturer because the order cost is low & holding cost is high

4. Buy many cars from the manufacturer because the order cost is high & holding cost is low

5. Not replenish his inventory and wait for interest rates to normalize

Answer 1

Andy should consider buying few cars from the manufacturer because of the high interest costs on his Line of Credit.

Step-by-step explanation:

In this case, Andy should consider the trade-off between order cost and holding cost. The order cost is the fee charged by the manufacturer for each unit Andy buys, and the holding cost refers to the interest expenses on Andy's Line of Credit. Since interest rates have risen sharply and the interest costs are expensive, it would be more cost-effective for Andy to buy few cars from the manufacturer. This way, he can reduce his inventory and lower his holding cost.