Question

A bicycle manufacturer purchases bicycle seats from an outside supplier for $20 each. The manufacturer’s inventory of seats turns over 1.2 times per month, and the manufacturer has an annual inventory holding cost of 32%. (Round your answer to 2 decimal places.) What is the inventory holding cost (in $) for a bicycle seat?

Answer 1

Let the number of seats purchased annually = N

Therefore , total annual value of seats = $20 / seat x N seats = $20.N

Inventory of seats turnover per month = 1.2 times

Therefore, inventory of seats turnover per year = 1.2 x 12 = 14.4 times

Since , Inventory turnover = Annual value of seats / average inventory of seats

Therefore, 14.4 = Annual value of seats / Average inventory of seats

Or, 14.4 = 20.N / average inventory of seats

Or, Average inventory of seats = 20N/14.4

Or, Average inventory of seats = 1.3888.N

Therefore , annual inventory holding cost for N number of seats = 32% of $20/ seat x 1.3888 .N seats = $8.888.N seats

Hence, average inventory holding cost per seat = $8.888.N / N = $8.888

ANNUAL INVENTORY HOLDING COST OF A BICYCLE SEAT = $8.888