Question

Diagnostic Supplies has expected sales of 84,100 units per year, carrying costs of $5perunit,andanorderingcostof$10 per order.

b. What is the average inventory? What is the total carrying cost?

Short answer

The average inventory will be 290 units and the carrying cost will be $1,450.

Step-by-step solution

Calculation of average inventory

The average inventory will be 290 units.

$\begin{array}{rcl}\mathrm{Average}\mathrm{inventory}& =& \frac{\mathrm{EOQ}}{2}\\ & =& \frac{580\mathrm{units}}{2}\\ & =& 290\mathrm{units}\end{array}$

Carrying cost of inventory

The total carrying cost is $1,450.

$\begin{array}{rcl}\mathrm{Carrying}\mathrm{cost}& =& \mathrm{Carrying}\mathrm{cost}\mathrm{per}\mathrm{unit}\times \mathrm{Average}\mathrm{inventory}\\ & =& \$5\times 290\mathrm{units}\\ & =& \$1,450\end{array}$