Question

The purchase price of an inventory item is GH¢30 per unit. In each three month period, the usage of the item is 30,000 units. The annual holding cost associated with unit equate to 5% of the purchase price. The cost of placing an order for the item is GH¢25. What is the optimal level of inventory units should be ordered in the nearest whole number? *
(a) 1,461
(b) 1,000
(c) 1,732
(d) 2,000

Answer 1

Given,

Purchase price = 30 per unit

Quarterly units = 30000 units

Annual holding cost rate = 5%

Ordering cost = 25 per order

Solution :-

Quarterly holding cost = purchase price x annual holding cost rate x 1/4

= 30 x 5% x 1/4 = 0.375

Now,

Optimal level of inventory units

= [(2 x quarterly units x ordering cost) quarterly holding cost]^1/2

= [(2 x 30000 units x 25) 0.375]^1/2

= [1500000 0.375]^1/2

= [4000000]^1/2

= 2000 units

Thus, option 'd' is correct.