Cat Co places monthly orders with a supplier for 10,000 components which are use

Question

Cat Co places monthly orders with a supplier for 10,000 components which are used in its manufacturing processes. Annual demand is 120,000 components. The current terms are payment in full within 90 days, which Cat Co meets, and the cost per component is $7.50. The cost of ordering is $200 per order, while the cost of holding components in inventory is $1.00 per component per year.

The supplier has offered a discount of 3.6% on orders of 30,000 or more components. If the bulk purchase discount is taken, the cost of holding components in inventory would increase to $2.20 per component per year due to the need for a larger storage facility

2. What is the total annual inventory cost if Cat Co orders 30,000 components at a time?

Explanation / Answer

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Total Inventory Months =120,000

Inventory Cost for 1 component for 12 months =$2.20

Inventory Cost for 1 component for 1 months =$2.20/12

Inventory Cost for 120,000 component for 1 months =$2.20/12*120,000 =$22,000

Description Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Order 30,000 30,000 30,000 30,000 Used 10000 10000 10000 10000 10000 10000 10000 10000 10000 10000 10000 10000 Balance Inventory 20000 10000 0 20000 10000 0 20000 10000 0 20000 10000 0 Cumulative Balance 20000 30000 30000 50000 60000 60000 80000 90000 90000 110000 120000 120000

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