Question

A product has a demand of 4000 units per year. Ordering cost is $20, and holding cost is $4 per unit per year. The TC (total cost) model is appropriate. If Q (order quantity) is 100, the total cost for this product will be __ TC-DS/Q+QH/2.

A) 5400
B) $800
C) S1000
D) Zero: this is a class C item.
E) Cannot be determined because the unit price is not known.

Answer 1

B) $800

Step-by-step explanation:

In order to determine the total cost first we have to find the economic order quantity which is shown below:

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

`= \sqrt{\frac{2* \text{4,000}* \text{\$20}}{\text{\$4}}}`

= 200 units

Now total cost is

= Ordering cost + holding cost

= (Annual demand ÷ Economic order quantity × Ordering cost per order) + (Economic order quantity ÷ 2 Holding cost per unit)

= (4,000 units ÷ 200 units × $20) + (200 units ÷ 2 × $4)

= $400 + $400

= $800