Question

Globe Inc. is a distributor of DVDs. DVD Mart is a local retail outlet which sells blank and recorded DVDs. DVD Mart purchases DVDs from Globe at $ 25 per? DVD; DVDs are shipped in packages of 60. Globe pays all incoming? freight, and DVD Mart does not inspect the DVDs due to? Globe's reputation for high quality. Annual demand is 320,000 DVDs at a rate of 6,600 DVDs per week. DVD Mart earns 11?% on its cash investments. The purchaseminusorder lead time is one week. The following cost data are? available: Relevant ordering costs per purchase order $ 119.50 Carrying costs per package per? year: Relevant? insurance, materials? handling, breakage,? etc., per year $ 7.50

What are the annual relevant carrying? costs?

A) $7,414

B) $5,423

C) $678

D) $7,581

The correct answer is "A". Please explain step-by-step how to solve this

Answer 1

Solution:
	Answer is A). $7,414
Working Notes:
	Annual carrying cost = Average inventory x Annual carrying cost per unit.
	Annual carrying cost = ((EOQ in package x No. of DVD in a packages)/2) x Annual carrying cost per unit.
	=((85.96 x 60)/2) x $2.875 per unit	[EOQ = 85.96 & Annual carrying cost per unit =$2.875 is used from below workings]
	=$7,414.05
	=$7,414
Notes:	EOQ = SQRT(2 × Quantity × order Cost Per Order / Carrying Cost Per unit)
	Quantity Q = 320,000 units
	Ordering cost per order = $119.50 per order
	Carrying cost = (cost per DVD x interest rate + Other carrying cost per packages/No of DVD in a package) = ( $25 x 11% + $7.50/60) per unit = $2.875 per unit
	EOQ = SQRT(2 × 320,000 × 119.50 / 2.875)
	EOQ = (26,601,739.1304)^(1/2)
	EOQ= 5,157.68737 DVDs
	EOQ = 5,157.68737/60   in no of package
	EOQ = 85.96 packages
Please feel free to ask if anything about above solution in comment section of the question.