Question

A retail store sells 500 jackets each month. Each jacket costs the store $99, and for holding cost purposes, the store estimates capital costs of 12%, storage costs of 10%, and risk costs of 3%. Furthermore, the store incurs annual operating expenses for purchasing in the amount of $1080 in addition to $10 for inspecting and receiving each order. If the store currently places a replenishment order of 650 jackets each time, what is the total annual holding and ordering cost? (Round your answer to the nearest integer)

Answer 1

1) The total annual holding cost is $144,788

2) The annual ordering cost is $1170

Explanation:

The parameters given are;

The number of jackets sold per month = 500 jackets

The cost of each jacket = $99

The capital cost = 12%

The storage cost = 10%

The risk cost = 3%

Annual purchasing expenses = $1080

Cost for inspecting and receiving each order = $10

Number of jackets contained in each order = 650 jackets

1) Therefore, we have;

Number of jackets sold per annum = 500 × 12 = 6,000

Number of times jackets are ordered per year = (Number of jackets sold per annum)/(Number of jackets sold per annum)

Number of times jackets are ordered per year = 6000/650 = 9.23≈9 orders

Total cost of order = 9 × 650 × 99 = $579,150

Given that the total annual holding cost = (12 + 10 + 3)% of ordering cost

Therefore, the total annual holding cost = 25% of ordering cost

the total annual holding cost = 0.25 × 579,150

The total annual holding cost = $144,787.5 ≈ $144,788

2) The annual purchasing operating expense = $1080

The total cost of inspecting the 9 orders = 9 × $10 = $90

The annual ordering cost = $1080 + $90 = $1170