Sarah's Computer City sells 5,000 boxes of CD- RW compact discs per year.She determined that she pays $50 to process an order for discs.Her purchase price is $6 for each box of discs and she has determined that storage costs for one year are 25 percent of the purchase price.Sarah's vendor said that if she purchased 1,000 boxes at a time,she would receive a 10 percent discount.The total cost formula is TC = DP +^QIP+^DS.
2 Q
What is Sarah's annual ordering cost if she takes advantage of the discount?

Question

Quizplus · Accepted Answer

First, we need to calculate the total annual cost with the discount.

Ordering cost = (Annual demand/Quantity ordered per order) * Cost per order
Annual demand = 5000 boxes
Quantity ordered per order = 1000 boxes
Cost per order = $50 - 10% discount = $45

Ordering cost = (5000/1000) * $45 = $225

Now, we need to calculate the total annual inventory cost.

Purchase cost = Annual demand * Purchase price per unit
Annual demand = 5000 boxes
Purchase price per unit = $6 - 10% discount = $5.4

Purchase cost = 5000 * $5.4 = $27,000

Storage cost = 25% * Purchase price per unit = 25% * $6 = $1.5 per unit
Total inventory = Quantity per order = 1000 boxes

Inventory cost = (Total inventory/2) * Storage cost = (1000/2) * $1.5 = $750

Total annual cost = Ordering cost + Purchase cost + Inventory cost
Total annual cost = $225 + $27,000 + $750 = $27,975

Therefore, the best choice is to take advantage of the discount and order 1000 boxes at a time, which results in an annual ordering cost of $225, and a total annual cost of $27,975.

Sarah's Computer City Sells 5,000 Boxes of CD- RW Compact