[I'm, Ron Burgundy?]

Can anyone clarify for me the answer explanation of why they are dividing the quantity of 500 units by two?

A company sells 1,500 units of a particular item each year and orders the items in equal quantities of 500 units at a price of $5 per unit. No safety stocks are held. If the company has a cost of capital of 12%, its annual cost of carrying inventory is

$900

$180

$300

$150

Answer $150. Explanation:

The annual cost of carrying inventory is the average inventory level times the cost per unit of inventory times the cost of capital. It is calculated as follows: Average inventory level x Unit cost x Cost of capital = (order size / 2) x $5 x .12 = (500 / 2) x $5 x .12 = $150.

"If you're going through hell, keep going"
- Winston Churchill

"I've missed over 9,000 shots in my career. I've lost over 300 games. 26 times I've been trusted to take the game winning shot, and missed. I've failed, over and over and over again in my life. And that is why, I succeed."
- Michael Jordan

BEC: (54), (72), 80 (losing credit on 02/02/15 - nervous)
AUD: 78
REG: (74), 91
FAR: (71)

[rjcpa]

Because the formula uses the average inventory. 0 + 500 = 500/2.

FAR - 10/3/12 - 86
BEC - 11/27/12 - 70 1/14/13 - 81
AUD - 4/4/13 - 87
REG - 7/8/13 - 80

[Sudad]

the formula used average inventory, and since there is no beg invty you will use 0 plus ending invty of 500 equals 250

DONE!!!

[I'm, Ron Burgundy?]

Thank you for your help in clarifying, it makes a little more sense to me now. However, if they are planning to sell 1500 units throughout the year and they order 500 at a time, wouldn't that be 3 orders for the year? I know that they don't keep a safety stock but considering the demand for the year why wouldn't they make three orders? I'm just a bit confused. Please let me know if I'm over-thinking this or if there is something I'm missing.

"If you're going through hell, keep going"
- Winston Churchill

"I've missed over 9,000 shots in my career. I've lost over 300 games. 26 times I've been trusted to take the game winning shot, and missed. I've failed, over and over and over again in my life. And that is why, I succeed."
- Michael Jordan

BEC: (54), (72), 80 (losing credit on 02/02/15 - nervous)
AUD: 78
REG: (74), 91
FAR: (71)

[mla1169]

I'm sure they do/would make three orders. It actually doesn't matter how many orders they place because the inventory will never be over 500 units at a time.

FAR- 77
AUD -49, 71, 84
REG -56,75!
BEC -75

Massachusetts CPA (non reporting) since 3/12.

[no.cruncher]

WOW… Thanks for bringing this MC up, have not seen one like this, and would've jumped the gun. BEC is no joke!

FAR - 7/16/2012 *76 : 2.5mo [Exp. 1/2014]
AUD - 8/31/2012 *82 : 1mo
REG - 11/27/2012 *83 : 2.5mo
BEC - 2/27/2013 *80 : 2.5mo LET'S DO THIS!!!
Ethics - 3/13

[ 2011 Kaplan Self Study - Textbook, MP3s, FlashCards ]

CMA... Hmmm...???

[I'm, Ron Burgundy?]

Okay, I get that part and thanks again for clarifying. But I still am missing something: Why two orders? Are you figuring the beginning amount of 0 and one order of 500?

Gotta love examiners, they certainly know how to keep things open for interpretation.

"If you're going through hell, keep going"
- Winston Churchill

"I've missed over 9,000 shots in my career. I've lost over 300 games. 26 times I've been trusted to take the game winning shot, and missed. I've failed, over and over and over again in my life. And that is why, I succeed."
- Michael Jordan

BEC: (54), (72), 80 (losing credit on 02/02/15 - nervous)
AUD: 78
REG: (74), 91
FAR: (71)

[Author]

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