A North Face retail store in Chicago sells 500 jackets each month. Each jacket costs the store $100 and the company has an annual holding cost of 25 percent. The fixed cost of a replenishment order (including transportation) is $100. The store currently places an replenishment order every month for 500 jackets. What is the annual holding and ordering cost?

Explanation:

Monthly Quantity sold = 500 units

Annual demand = 500 x 12 = 6000 units

Cost per order = $100

Carrying cost = 25% = 25% x $100 = 25per unity per year

Holding cost per period = 1/2 x ordered quantity x holding cost

                                        = 1/2 x 500 x 25

                                        = 12500/2

 Annual Holding cost     =$ 6250

To calculate the number of order we get according to the below mentioned formula

Number of orders = Annual Demand / Order quantity

                              = 500 x 12/500

                              = 12

To calculate the ordering cost, we use the formula as under

Ordering cost = Number of orders x cost per order

                        = 12 x 100

Annual ordering cost= $ 1200

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