The carrying costs associated with inventory management include
Answer(s): B
Carrying costs include storage costs, handling costs, insurance costs, interest on capital invested, and obsolescence. Candman Company is a wholesale distributor of candy. The company leases space in a public warehouse and is charged according to the square feet occupied. Candman has decided to employ the economic order quantity 0Q) method to determine the optimum number of cases of candy to order. The company placed 2, 400 orders last year. Data for the high-activity month, the low-activity month, and the year for the purchasing and warehouse operations appear in the next column. The annual charges for the warehouse totaled US $12, 750 last year. In addition, the annual insurance and property taxes on the candy stored in the warehouse amounted to US $1, 500 and US $2, 250, respectively. The average monthly inventory last year was US $75, 000.
What is the incremental cost of placing an order that would be used in the EOO model?
Answer(s): D
The incremental cost of additional orders equals the variable costs incurred in purchasing and receiving inventory but not costs associated with shipping). Using the high-low method of analysis, these variable costs can be computed by determining the apparent variable costs for the two given levels of activity. For 160 orders, the relevant costs with a variable element include purchasing clerks, US $1, 750: supplies, US $400, and receiving clerks, US $2, 200. The total is US $4, 350. For 100 orders, these costs are US $1, 250, US $260, and US $1, 700, respectively, for a total of US $3, 210. As the number of orders increased by 60, the costs increased by US $1 .140. Consequently, the variable or incremental costs per order must have been US $19 $1 .140 - 60 orders). Candman Company is a wholesale distributor of candy. The company leases space in a public warehouse and is charged according to the square feet occupied. Candman has decided to employ the economic order quantity 0Q) method to determine the optimum number of cases of candy to order. The company placed 2, 400 orders last year. Data for the high-activity month, the low-activity month, and the year for the purchasing and warehouse operations appear in the next column. The annual charges for the warehouse totaled US $12, 750 last year. In addition, the annual insurance and property taxes on the candy stored in the warehouse amounted to US $1, 500 and US $2, 250, respectively. The average monthly inventory last year was US $75, 000.
What is the annual carrying cost, stated as a percentage of investment in inventory, that would be used in model?
Answer(s): A
The annual carrying costs are US $12, 750 for the warehouse, US $1, 500 for insurance, II and US $2, 260 for proper taxes. These costs total US $16, 500. In addition, the company desires a 12% after-tax return on investments. Because the tax rate is 40%, the 12% after-tax return equals a 20% before-tax return 12% - 60%). A 20% return on the US $75, 000 average investment in inventory is US $15, 000. Hence, the total carrying cost is US $31, 500 $16, 500 + $15, 000). This amount is 42% of the US $75, 000 investment in inventory.
When the economic order quantity EOQ) decision model is employed, the List A are being offset or balanced
The objective of the EOQ model is to find an optimal order quantity that balances carrying and ordering costs. Only variable costs should be considered. The EOQ is the point where the ordering cost and carrying cost curves intersect. It corresponds to the minimum point on the total inventory cost curve.
The calculation of an economic order quantity EOQ) considers
The determination of the economic order quantity balances the variable costs of ordering and carrying inventory. Factors in the equation include the cost of placing an order, unit carrying cost, and annual demand in units. Carrying costs include storage costs, handling costs, insurance, property takes, obsolescence, and the opportunity cost of investing capital in inventory. Thus, the return on capital that is forgone when it is invested in inventory should be considered.
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