Using a computerized Inventory Management System, a Paint Supply Store franchise continuously monitors the inventory of all the paint located at each of their 15 stores and their distribution warehouse. The Paint Supply Store franchise sells an average of 30 gallons of Red Paint every week (for 52 weeks per year). Their current policy is that when they place an order for Red Paint from their supplier, they order 70 gallons at a price of $2.00 per gallon. [The company does not hold Safety Stock] It takes 1.25 weeks to receive an order from the supplier.
Administrative costs for Ordering paint have been estimated to be $15 per order.
Holding Costs = 20% of the purchase price per gallon per year.
What is the Total Annual Inventory Cost for the company's current policy?
A. $348.29
B. $370.43
C. $75.40
D. $341.29
E. $249.60

Option A. $348.29

Explanation:

Here we can find the total inventory cost by using the following formula:

Total inventory cost = Total Ordering Cost (Step1) + Total Holding Cost (Step2) Equation 1

Now here,

Step 1.

Total ordering cost = Number of Orders  * Ordering cost per order

The information provided in the question is as under:

Ordering cost per order is $15

Total Order quantity is 70 gallon per order

Weekly demand = 30 gallons

Which means that the Annual demand = 30 Weekly demand * 52 weeks

Annual demand  = 1560 Gallons

Hence the Number of orders = annual demand/order quantity = 1560/70

= 22.2857

By putting the values, we have:

Total ordering cost = 22.2857 Number of orders * $15 per order = $334.29

Step 2.

Total Holding cost = Ordering Quantity / 2 * Holding cost  

Price Per Unit is $2 per gallon

Holding cost per unit per year = 20% of Price Per Unit

Holding cost per unit per year = $2 * 20% = $0.4 per Unit per year

Ordering Quantity is 70 gallons per order

By putting the values, we have:

Total Inventory Holding Cost =  (70 Orders / 2)   * $0.4 = $14

Now putting values in the equation 1, we have:

Total inventory cost = $334.29 + $14 = $348.29

Hence the option A is correct.

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