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Calculating company inventory given annual sales and costs.

Question:

Sales are estimated to be 4,500 units annually at $3,000 each.

The cost of each unit for Taylor Incorporated is $1,200.
Inventory carrying cost is 5% of the cost value of the device.
Order placement cost is $60.
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1. Identify the number of units to purchase.
2. Identify the number of orders per year that must be made.

(In other words, what are the inventory reorder points and the quantities per order?)

Solution Preview

To get to the solution, a few formulas are needed:

The Total Cost function:

Total Cost = purchase cost + ordering cost + holding cost
TC = PC + OC + HC

Where:

PC = variable cost of goods = purchase price per unit * annual demanded = P*D

OC = cost of placing orders = fixed cost of ordering * (annual ...

Solution Summary

Knowing annual sales, unit costs, carrying costs, and order placement costs for Taylor Incorporated, one can calculate the point at which Taylor Incorporated will need to reorder inventory and how much inventory will be necessary.

$2.19