Southern hydraulic supply is undertaking a review of their inventory policies. a typical product is a small hydraulic fitting. currently, southern orders 1,000 of these fittings at a time from their supplier. the demand for the fittings is 52,000 per year, the ordering cost is $50 per order, and the cost to hold one fitting in inventory for one year is $1.25. each unit costs $8. what is the total annual cost of southern’s current inventory policy? group of answer choices $2039 $300,000 $418,550 $419,225

$418,550

Explanation:

Steps are shown below:

a. The computation of the economic order quantity is shown below:

=

=

= 2,040 units

b. The number of orders would be equal to

= Annual demand ÷ economic order quantity

= $52,000 ÷ 2,040 units

=  25.49 orders

c. The average inventory would equal to

= Economic order quantity ÷ 2

= 2040 units ÷ 2

= 1,020 units

d. The total cost of ordering cost and carrying cost equals to

Ordering cost = Number of orders × ordering cost per order

= 25.49 orders × $50

= $1,275

Carrying cost = average inventory × carrying cost per unit

= 1,020 units × $1.25

= $1,275

So, the total annual cost would be  

= Purchase cost + ordering cost + carrying cost

= $416,000 + $1,275 + $1,275

= $418,550

Purchase cost = Annual demand × cost per unit

                        = 52,000 × $8

                        = $416,000

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