Question

Fisk Corporation is trying to improve its inventory control system and has installed an online computer at its retail stores. Fisk anticipates sales of 49,000 units per year, an ordering cost of \(8 per order, and carrying costs of \)1.60 per unit.

d. What is the total cost of ordering and carrying inventory?

Short answer

The total cost of ordering and carrying inventory is $1,120.

Step-by-step solution

Ordering cost of inventory

The ordering cost is $560.

$\begin{array}{rcl}\mathrm{Ordering}\mathrm{cost}& =& \mathrm{Number}\mathrm{of}\mathrm{orders}\times \mathrm{Cost}\mathrm{per}\mathrm{order}\\ & =& 70\times \$8\\ & =& \$560\end{array}$

Carrying cost of inventory

The carrying cost is $560.

$\begin{array}{rcl}\mathrm{Carrying}\mathrm{cost}& =& \mathrm{Average}\mathrm{cost}\times \mathrm{Carrying}\mathrm{cost}\mathrm{per}\mathrm{unit}\\ & =& 350\times \$1.60\\ & =& \$560\end{array}$

Carrying cost of inventory

The total carrying and ordering cost is $1,680.

$\begin{array}{rcl}\mathrm{Total}\mathrm{cost}& =& \mathrm{Carrying}\mathrm{cost}+\mathrm{Ordering}\mathrm{cost}\\ & =& \$560+\$560\\ & =& \$1,120\end{array}$