Question

using a computerized inventory management system, a paint supply store franchise continuously monitors the inventory of all the paint located at each of their 15 stores and their distribution warehouse. the paint supply store franchise sells an average of 60 gallons of green paint every week (for 52 weeks per year). their current policy is that when they place an order for green paint from their supplier, they order 85 gallons at a price of $3.50 per gallon. [the company does not hold safety stock] it takes 2.25 weeks to receive an order from the supplier. administrative costs for ordering paint have been estimated to be $30 per order. holding costs

Answer 1

Holding costs if 40% of the purchase price per gallon per year. The total annual inventory cost for the company's current policy is $1,487.56.

The total cost of annual holdings and yearly service fees is included in the annual index cost.

This can be estimated by:

Cost of ordering = $35

Ordering number = 90 gallons

Price = $4.00

Cost of holding = 40% × 4 = 1.6 per unit per year

Weekly needs = 70 gallons

Number of weeks in a year = 52

Yearly demand = 52 × 70 = 3630

Numbers of orders = 3640/90 = 40.444

Total ordering price = 40.444 × 35 = 1415.56

Inventory holding amount = 90/2 × 1.6 = $72

Total inventory cost = 1,415.56 + $72 = $1,487.56

Therefore, the total annual inventory cost will be $1,487.56.

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