Question

4. A retail company is reevaluating its inventory policy for meeting a constant annual demand of 5,200 units for its top-selling product. The current inventory policy is to order 650 units each time. The company purchases the product from a manufacturer at a wholesale price of $20 per unit. The company also pays $80 as the ordering cost for each order regardless of the order quantity. The company’s inventory capital is borrowed from a bank at a simple annual interest rate of 10%. In addition, the company must pay a tax of 6% of the annual inventory value and another 3% of the annual inventory value for insurance. The lead time is estimated to be 4 days and the business opens 365 days a year.

Calculate the total annual holding cost under the current inventory policy:

Answer 1

The total annual holding cost under the current inventory policy is $1,235

Step-by-step explanation:

According to the given data we have the following:

A = Annual Demand = 5200 units

Q = 650 units

k = conveying or holding cost rate = the aggregate of loan fee, stock duty and stock protection = 10+6+3 =19%

c = Unit Cost Price = $20/unit

h =holding or conveying cost = kc = 20*19% = $3.8/unit

L = lead time = 4 days

Therefore, in order to calculate the total annual holding cost under the current inventory policy we would have to use the following formula:

Total annual holding cost=Average Inventory*Holding Cost per unit=(Q/2)* h

Therefore, Total annual holding cost= (650/2)*3.8 = $1,235

The total annual holding cost under the current inventory policy is $1,235