Question 2 Sheetz\' purchasing department is trying to establish an ordering pol
ID: 361583 • Letter: Q
Question
Question 2
Sheetz' purchasing department is trying to establish an ordering policy for coffee that will minimize total costs. Forecasted demand for coffee for the next year is 300,000 lbs. The supplier offers the following quantity discount schedule.
Order Quantity Price per pound
0-9,999 11.25
10,000-29,999 11.00
30,000+ 10.55
The purchasing department estimates the cost of placing an order at $161 and the inventory holding cost to be 38% of the unit cost. If purchasing orders in lot sizes of 32,000, what will the total annual inventory cost be? Please enter your answer with two decimal places.
Explanation / Answer
Annual demand D = 300000lbs
Ordering cost S = $161
If Q = 32000
Price C = 10.55
Holding cost H = 38% = 0.38*10.55 = $4.009
Total annual inventory cost = Purchase cost + Annual holding cost +Annual ordering cost
= (CD) + (Q/2)H+ (D/Q)S
= (10.55*300000) + (32000/2)*4.009 + (300000/32000)*161 = 3165000 + 64144+1509.38 = $3230653.38
Total annual inventory cost = $3230653.38
(Note: Calculated including purchase cost)
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