Libations Corporation manufactures a line of flags. The annual demand for its fl

Question

Libations Corporation manufactures a line of flags. The annual demand for its flag display is estimated to be 100,000 units. The annual cost of carrying one unit in inventory is $1.60, and the cost to initiate a production run is $50. There are no flag displays on hand, but Libations had scheduled 60 equal production runs of the display sets for the coming year, the first of which is to be run immediately. Libations Corporation has 250 business days per year. Assume that sales occur uniformly throughout the year and that production is instantaneous. If Libations Corporation does not maintain a safety stock, the estimated total carrying cost for the flag displays for the coming year is

a. $2,667.

b. $2,000.

c. $1,600.

d. $1,333.

Explanation / Answer

The annual demand for flag display is 100000 units. As sales occurs uniformly throughout the year , the monthly sales = 8333.33 units The company had scheduled 60 equal production runs of the display sets for the year. Hence units produced per run = 100000 units / 60 = 1667.667 units The carrying cost per unit of inventory = $1.60 Hence total carrying cost for the flag display = 1667.667 units * 1.60 = $2666.667 i.e.$2667

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