Question

A product has a demand of 4000 units per year. Ordering cost is $20, and holding cost is $4 per unit per year. The TC (total cost) model is appropriate. If Q (order quantity) is 100, the total cost for this product will be __ TC-DS/Q+QH/2.
A) 5400
B) $800
C) S1000
D) Zero: this is a class C item.
E) Cannot be determined because the unit price is not known.

Answer 1

Answer:

B) $800

Explanation:

In order to determine the total cost first we have to find the economic order quantity which is shown below:

$= \sqrt{\frac{2\times \text{Annual demand}\times \text{Ordering cost}}{\text{Carrying cost}}}$

$= \sqrt{\frac{2\times \text{4,000}\times \text{\ 20}}{\text{\ 4}}}$

= 200 units

Now total cost is

= Ordering cost + holding cost

= (Annual demand ÷ Economic order quantity × Ordering cost per order) + (Economic order quantity ÷ 2  Holding cost per unit)  

= (4,000 units ÷ 200 units × $20) + (200 units ÷ 2 × $4)

= $400 + $400

= $800