A Printing Company Estimates That It Will Require 1,000 Reams

question 32

Essay

A printing company estimates that it will require 1,000 reams of a certain type of paper in a given period. The cost of carrying one unit in inventory for that period is 50 cents. The company buys the paper from a wholesaler in the same town, sending its own truck to pick up the orders at a fixed cost of $20.00 per trip. Treating this cost as the order cost, what is the optimum number of reams to buy at one time?
How many times should lots of this size be bought during this period?
What is the minimum cost of maintaining inventory on this item for the period?
Of this total cost, how much is carrying cost and how much is ordering cost?

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Definitions:

Firm's Cost

The total expenses incurred by a company, including production, operation, and overhead costs.

Reinvestment Assumption

The presumption that cash flows received from an investment will be reinvested at a rate consistent with the investment's original rate of return.

Net Present Value

A financial metric that calculates the present value of all future cash flows associated with an investment, minus the initial investment cost.

Present Value

The current worth of a future sum of money or stream of cash flows given a specified rate of return.