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You are the purchasing manager and you buy a raw material having the following information: Annual demand = 2000 units Fixed order quantity = 200 units Order cost = $100 / order Inventory carrying cost = 25% Per unit purchase cost = $10 / unit Safety stock = 20 On average, what is the dollar value of inventory that you will have for this material?

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Answer:

Cost of Inventory = 1000 + 200 = $1200

Explanation:

Total Demand = 2000

Fixed order quantity = 200

No. of orders to meet this demand = 2000/200 = 10

Cost per order = $100

Total cost of 10 orders = 10 * 100 = $1000

Safety stock = 20

Per unit cost = $10

Cost of safety stock = 20 * 10 = $200

Total inventory = 2020 (Demand + Safety stock)

Cost of Inventory = 1000 + 200 = $1200

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