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Assume a certain product has an order cost of $12. Holding cost is $1 per product to hold for a year. Monthly demand is 200 units. Which of the following ordering plans would you use to minimize the Total Inventory Cost? a) Make one order each year b) Make one order per quarter c) Make one order each month d) Make one order each week e) Make 8 orders per year. f) None of the above (what is your answer?)

User Gloria
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Final answer:

option B. To minimize the Total Inventory Cost, the best ordering plan is to make one order per quarter. This option has a Total Inventory Cost of $98.

Step-by-step explanation:

To minimize the Total Inventory Cost, it is important to consider the order cost and holding cost. In this scenario, the order cost is $12 and the holding cost is $1 per product per year. The monthly demand is 200 units. To calculate the Total Inventory Cost for each ordering plan, you need to consider the number of orders per year and the average inventory level.

a) Make one order each year: Total Inventory Cost = (Order Cost * Number of Orders) + (Holding Cost * Average Inventory Level)
Number of Orders = 1, Average Inventory Level = Monthly Demand / 2 = 200 / 2 = 100
Total Inventory Cost = ($12 * 1) + ($1 * 100) = $12 + $100 = $112

b) Make one order per quarter: Number of Orders = 4, Average Inventory Level = Monthly Demand / 4 = 200 / 4 = 50
Total Inventory Cost = ($12 * 4) + ($1 * 50) = $48 + $50 = $98

c) Make one order each month: Number of Orders = 12, Average Inventory Level = Monthly Demand / 12 = 200 / 12 = 16.67 (rounded to 17)
Total Inventory Cost = ($12 * 12) + ($1 * 17) = $144 + $17 = $161

d) Make one order each week: Number of Orders = 52, Average Inventory Level = Monthly Demand / 52 = 200 / 52 = 3.85 (rounded to 4)
Total Inventory Cost = ($12 * 52) + ($1 * 4) = $624 + $4 = $628

e) Make 8 orders per year: Number of Orders = 8, Average Inventory Level = Monthly Demand / 8 = 200 / 8 = 25
Total Inventory Cost = ($12 * 8) + ($1 * 25) = $96 + $25 = $121

Based on the calculations, the ordering plan that minimizes the Total Inventory Cost is option b) Make one order per quarter with a Total Inventory Cost of $98.

Therefore, the answer to the question is option b) Make one order per quarter.

User Randomness
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