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:

Question

Business

Alfonso Dillon

8 December, 03:59

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:

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Answers (1)

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Trevor Blanchard · Answer 1

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

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