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 30 gallons of Red Paint every week (for 52 weeks per year). Their current policy is that when they place an order for Red Paint from their supplier, they order 70 gallons at a price of $2.00 per gallon. [The company does not hold Safety Stock]It takes 1.25 weeks to receive an order from the supplier.Administrative costs for Ordering paint have been estimated to be $15 per order.Holding Costs = 20% of the purchase price per gallon per year.What is the Total Annual Inventory Cost for the company's current policy?A. $348.29B. $370.43C. $75.40D. $341.29E. $249.60

Answer 1

Answer:

A. $348.29

Explanation:

Given that:

The Paint Supply Store franchise sells an average of 30 gallons of Red Paint every week (for 52 weeks per year)

i.e weekly demand = 30 gallons

Since 30 gallons is demanded weekly

Then annual demand for a year that contains 52 weeks = 30 × 52

= 1560

Order quantity = 70 gallons

Thus; number of orders = annual demand for a year / order quantity

number of orders = 1560 /70

number of orders = 22.2857

Price per gallon = $2.00

Time to receive order = 1.25 weeks

Administrative cost Ordering paint (i.e ordering cost per order) = $15

The total Ordering cost per order = number of orders × ordering cost per order

The total Ordering cost per order =  22.2857 × 15

The total Ordering cost per order =  $334.2855

Holding cost = 20% of the purchase price per gallon per year

Holding cost = 20/100 × $2

Holding cost =  0.2 × $2

Holding cost = $0.4 per unit per year

∴

The Inventory Holding cost = ( order quantity /2 ) × holding cost

The Inventory Holding cost =  (70/2) × 0.4

The Inventory Holding cost = 35  × 0.4

The Inventory Holding cost = $14

Finally, Total Annual Inventory Cost for the company's current policy is :

Total Annual Inventory Cost  = Total Ordering cost per order + Inventory Holding cost

Total Annual Inventory Cost  =  $334.2855 + $14

Total Annual Inventory Cost = $348.2855

Total Annual Inventory Cost ≅ $348.29