Question

In the second year, Fisk Corporation finds that it can reduce ordering costs to \(2 per order but that carrying costs stay the same at \)1.60 per unit. Also, volume remains at 49,000 units per year.

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

Short answer

The total cost of ordering and carrying inventory is $560.

Step-by-step solution

Ordering cost of inventory

The ordering cost is $280.

$\begin{array}{rcl}\mathrm{Ordering}\mathrm{cost}& =& \mathrm{Number}\mathrm{of}\mathrm{orders}\times \mathrm{Cost}\mathrm{per}\mathrm{order}\\ & =& 140\times \$2\\ & =& \$280\end{array}$

Carrying cost of inventory

The carrying cost is $280.

$\begin{array}{rcl}\mathrm{Carrying}\mathrm{cost}& =& \mathrm{Average}\mathrm{inventory}\times \mathrm{Carrying}\mathrm{cost}\mathrm{per}\mathrm{unit}\\ & =& 175\times \$1.60\\ & =& \$280\end{array}$

Carrying cost of inventory

The total carrying and ordering cost is $560.

$\begin{array}{rcl}\mathrm{Total}\mathrm{cost}& =& \mathrm{Carrying}\mathrm{cost}+\mathrm{Ordering}\mathrm{cost}\\ & =& \$280+\$280\\ & =& \$560\end{array}$