Question

Saltycustoms T-shirt is an online retailer of t-shirts, orders 100,000 t-shirts per year from its manufacturer. The company will order t-shirts 12 times over the next year. The company receives the same number of t-shirts each time it orders. The carrying cost is RM0.10 per shirt per year. What is the annual carrying cost of the t-shirt inventory (rounded to the nearest Ringgit Malaysia)?

Select one:

a. RM10,000

b. RM834

c. RM417

d. RM5,000

Answer 1

Solution

The answer is c. RM417

Explanation:

Since Saltycustoms orders 100,000 t-shirts per year and will order that quantity over 12 orders each time reciving the same number of shirts, it will receive 100,000 /12 = 8,333 shirts each time. This inventory will be carried for a month on an average since there are 12 such orders assuming that orders are placed when inventory is at 0 level or near 0 levels. So the average monthly inventory is:

(Opening monthly inventory + Closing monthly inventory) / 2

= (8333 + 0) / 2

= 4167 t-shirts

This is the average level of inventory which will be held throughout the year.

Its carrying cost is RM0.10 per t-shirt per year

Thus, total annual carrrying cost of the average inventory of 4167 shirts is 4167 x 0.10 = 416.7 or RM417.