Answer the following questions using the information below:
Digital Goods is a distributor of DVDs. DVD Mart is a local retail outlet which sells blank and recorded DVDs. DVD Mart purchases tapes from Digital Goods at $10.00 per DVD; DVDs are shipped in packages of 25. Digital Goods pays all incoming freight, and DVD Mart does not inspect the DVDs due to Digital Goods' reputation for high quality. Annual demand is 208,000 DVDs at a rate of 4,000 DVDs per week. DVD Mart earns 15% on its cash investments. The purchase-order lead time is one week. The following cost data are available:

-What are the relevant total costs?
A)$5,697
B)$2,829
C)$8,029
D)$2,868

Question

Answer the following questions using the information below:
Digital Goods is a distributor of DVDs. DVD Mart is a local retail outlet which sells blank and recorded DVDs. DVD Mart purchases tapes from Digital Goods at $10.00 per DVD; DVDs are shipped in packages of 25. Digital Goods pays all incoming freight, and DVD Mart does not inspect the DVDs due to Digital Goods' reputation for high quality. Annual demand is 208,000 DVDs at a rate of 4,000 DVDs per week. DVD Mart earns 15% on its cash investments. The purchase-order lead time is one week. The following cost data are available:
 
-What are the relevant total costs?
A)$5,697 
B)$2,829 
C)$8,029 
D)$2,868

Quizplus · Accepted Answer

The relevant total costs are the ordering costs, the carrying costs, and the purchasing costs.

Ordering costs = (annual demand/order quantity) * ordering cost per order
= (208,000/25) * $150
= $1,248

Purchasing costs = annual demand * purchase price per unit
= 208,000 * $10
= $2,080,000

Carrying costs = (order quantity/2) * carrying cost per unit
= (25/2) * $0.50
= $6.25

Total relevant costs = ordering costs + purchasing costs + carrying costs
= $1,248 + $2,080,000 + $6.25
= $2,081,254

The best choice is to continue to order DVDs from Digital Goods since their high quality reputation eliminates the need for DVD Mart to inspect the DVDs. The total relevant costs for this option are $2,081,254.

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