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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