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    Classification of inventory costs

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    A manufacturer of wooden furniture carries in its warehouse only one type of inventory: lumber. Following are various costs that may or may not be associated with the inventory:

    (see chart in attached file)

    a. What is the inventory carry cost rate (I) for the total inventory stored?
    b. What is the average cost of processing a purchase order (S)? Assume that 3,000 purchase orders per year are processed.
    c. What is the EOQ for 1 by 4 inch boards? Assume that 30,000 of these boards are used annually.
    d. What is the annual cost of capital invested in 1 by 4 inch boards? (Ignore safety stock)

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    Solution Summary

    This posting contains classification of various inventory related costs under the heads of Ordering and Carrying cost.