A small manufacturer of mountain bikes located in Denver, Colorado, buys tires from a supplier in China. There is a monthly demand of 200 tires. The cost of placing an order Is exist200 and the holding cost is exist24 per tire per year. If the purchasing price is exist45 per tire and the economic order quantity is used, what is the total annual inventory cost? exist4, 800 exist2, 400 exist112,000 exist108,000 exist110, 400

$112,800

Explanation:

a. The computation of the economic order quantity is shown below:

=

where,

Annual demand equal to

= 200 × 12 months

= 2,400 tires

=

= 200 units

Now The number of orders would be equal to

= Annual demand ÷ economic order quantity

= $2,400 ÷ 200 units

= 12 orders

Ordering cost = Number of orders × ordering cost per order

= 12 orders × $200

= $2,400

And, The average inventory would equal to

= Economic order quantity ÷ 2

= 200 units ÷ 2

= 100 units

And, Carrying cost = average inventory × carrying cost per unit

= 100 units × $24

= $2,400

And, the purchase cost is

= Purchase price × Annual demand

= $45 × 2,400 units

= $108,000

Now

Total annual inventory cost = Ordering cost + Carrying cost + Purchase cost

= $2,400 + $2,400 + $108,000

= $112,800

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