Question

Post Card Depot, an large retailer of post cards, orders 7,955,726 post cards per year from its manufacturer. Post Card Depot plans on ordering post card 24 times over the next year. Post Card Depot receives the same number of post cards each time it orders. The carrying cost is $0.26 per post card per year. The ordering cost is $396 per order. What is the annual total inventory management costs of post card inventory?

Answer 1

Solution:

The annual total inventory management costs of post card inventory is = Annual ordering cost + Annual carrying cost

Calculation of Annual Ordering cost:

The formula for calculating the Annual ordering cost is

Annual ordering cost = No. of orders * Ordering cost per order

As per the information given in the question we have

No. of orders = 24   ; Ordering cost per order = $ 396 per order

Thus applying the available information in the formula we have

= 24 * $ 396

= $ 9,504

Thus the Annual ordering cost = $ 9,504

Calculation of Annual Carrrying cost:

The Annual Carrying cost is calculating using the formula

Annual Carrying cost = [ (Average inventory * Inventory carrying cost per unit ) ]/ 2

As per the information given in the question we have

Inventory carrying cost per post card = $ 0.26 per post card per year

No. of purchase units of post cards = $ 7,955,726    ; No. of orders = 24

Thus we have Average inventory = No. of purchase units / No. of orders

= $ 7,955,726 / 24

= 331,488.5833

= 331,489 ( when rounded off to the nearest whole number )

Thus average inventory = 331,489 post cards

Applying the available information in the formula for Annual carrying costs we have

= [331,489 * $ 0.26 ] / 2

= $ 861,87.14 / 2

= $ 43,093.57

Thus the Annual carrying costs = $ 43,093.57

Therefore we have the annual total inventory management costs of post card inventory is = Annual ordering cost + Annual carrying cost

= $ 9,504 + $ 43,093.57

= $ 52,597.57

= $ 52,598 ( when rounded off to the nearest whole number )

Thus the annual total inventory management costs of post card inventory = $ 52,598