The Annual Demand, Ordering Cost, and the Inventory Carrying Cost

question 75

Essay

The annual demand, ordering cost, and the inventory carrying cost rate for a certain item are D = 600 units, S = $20/order and I = 30% of item price. Price is established by the following quantity discount schedule. What should the order quantity be in order to minimize the total annual cost?
$$\begin{array} { | l | l | l | l | } \hline\text { Quantity } & 1 \text { to } 49 & 50 \text { to } 249 & 250 \text { and up } \\\hline \text { Price } & \$ 5.00 \text { per unit } & \$ 4.50 \text { per unit } & \$ 4.10 \text { per unit } \\\hline\end{array}$$

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Definitions:

Book Value

The net value of a company's assets minus its liabilities and preferred stock, reflecting the amount that shareholders would theoretically receive if the company was liquidated.

Market Value

The up-to-date price at which transactions for assets or services are conducted in a marketplace.

Building Account

An account used in accounting to track the costs associated with the construction or purchase of a building.

Operating Lease

A leasing arrangement that allows for the use of an asset without transferring ownership rights, typically treated as an operating expense in financial statements.