[Anonymous]

Wiley Question –

Hello,

Can anyone explain to me why I cannot use the formula E²=2SO/C to do it? E=500, S=1500, O=$5. Even though the result doesn’t make sense, but I still think the question is asking for C as carrying cost. Also, I couldn’t find the formula Average inventory level x Unit cost x Cost of capital = annual cost of carrying inventory in the Becker text. Thank you!

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

A. $150

B. $180

C. $300

D. $900

Answer A is correct. 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.