Assume that Palmer Executive Pens uses 1,440,000 gallons of ink each year. Furth

Question

Assume that Palmer Executive Pens uses 1,440,000 gallons of ink each year. Further, assume that Farmer can order the ink at a cost of $2 per gallon plus fixed ordering costs of $100 per order. the firm carrying cost is 20 percent of the inventory value, at cost. what is Palmer’s minimum costs of ordering and holding inventory?
Assume that Palmer Executive Pens uses 1,440,000 gallons of ink each year. Further, assume that Farmer can order the ink at a cost of $2 per gallon plus fixed ordering costs of $100 per order. the firm carrying cost is 20 percent of the inventory value, at cost. what is Palmer’s minimum costs of ordering and holding inventory?

Explanation / Answer

Optimum order quantity = (2OQ/I)^1/2

O= order cost = 100

Q= Quantity demanded per year= 1440000

I= Carrying cost per unit per year= 0.2*2= 0.4

Optimum order quantity= (2* 1440000* 100/0.4)^1/2= 26833

Number of orders= 1440000/26833= 54( rounded off)

Total minimum orderting costs= 54* 100= 5400

Carrying cost(Holding costs):

(order quantity/2) x holding cost per unit per year = 26833/2 *0.4= 67083

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