Question

M7_IND1. Chris Froome is a purchasing agent for a firm that sell components for high performance bicycles. One of the most popular components is the TDF bicycle frame which has an annual demand of 1,750 units. The cost of each frame is $675 and the inventory carrying cost is estimated to be 18% of the cost of each frame. Chris has made a study of the costs involved in placing an order for any of the frames the firm stocks, and he has concluded that the average ordering cost of $73 per order. Furthermore, it takes about one week for an order to arrive from the supplier, and the TDF operates 50 weeks per year. a) What is the annual ordering cost

Answer 1

Answer:

$2,777

Explanation:

For computing the annual ordering cost, first we have to determine the economic order quantity which is shown below:

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

$= \sqrt{\frac{2\times \text{1,750}\times \text{\ 73}}{\text{\ 121.50}}}$

= 46 units

The carrying cost is

= $675 × 18%

= $121.50

Now the annual ordering cost is

= Annual demand ÷ Economic order quantity × ordering cost per order

= 1,750 ÷ 46 × $73

= $2,777

Hence, the annual ordering cost is $2,777