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Calculate the annual ordering cost

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Sky Co expects annual demand for product Y to be 500,000 units. Product Y has a selling price of $19 per unit and is purchased for $11 per unit from a supplier, Sea Co. Sky places an order for 50,000 units of product Y at regular intervals throughout the year. Because the demand for product Y is to some degree uncertain, Sky maintains a safety (buffer) inventory of product Y which is sufficient to meet demand for 30 working days. The cost of placing an order is $40 and the storage cost for Product Y is 20 cents per unit per year.

Required:

  1. Calculate the annual ordering cost, annual inventory (holding) cost and annual total cost of inventory of the current ordering policy. Ignore financing costs in this part of the question.
  2. Calculate the annual ordering cost, annual inventory cost and annual total cost of inventory if the economic order quantity model is used to determine the optimal ordering policy. Ignore financing costs in this part of the question.

Reference no: EM132410861

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