Question

Nerolac Galore buys a standard type of roof paint (called Supreme Star Roof) in 50 litre containers at a price of P800 per container. 19 200 of these containers are used each year. The stock controller estimates that the cost of placing and receiving a typical Supreme Star Roof order is P450. The controller’s estimate of the annual cost of carrying this product is P6 per container. Suppose Nerolac Galore was to order 800 containers of Supreme Star Roof per order placed during the year. Calculate the following:

(a) Number of orders (1 mark)

(b) Annual ordering cost

(c) Average quantity in inventory

(d) Annual holding cost

(e) Total annual cost of inventory

Answer 1

Answer a.

Annual usage = 19,200
Order size = 800 containers

Number of orders = Annual usage / Order size
Number of orders = 19,200 / 800
Number of orders = 24

Answer b.

Ordering cost per order = P450

Annual ordering cost = Number of orders * Ordering cost per order
Annual ordering cost = 24 * P450
Annual ordering cost = P10,800

Answer c.

Average quantity in inventory = Order size / 2
Average quantity in inventory = 800 / 2
Average quantity in inventory = 400 containers

Answer d.

Holding cost per container = P6

Annual holding cost = Average quantity in inventory * Holding cost per container
Annual holding cost = 400 * P6
Annual holding cost = P2,400

Answer e.

Purchase price per container = P800

Annual purchase cost = Annual usage * Purchase price per container
Annual purchase cost = 19,200 * P800
Annual purchase cost = P15,360,000

Total annual cost of inventory = Annual purchase cost + Annual ordering cost + Annual holding cost
Total annual cost of inventory = P15,360,000 + P10,800 + P2,400
Total annual cost of inventory = P15,373,200