A beer distributor finds that it sells on average 100 cases a week of regular 12

Question

A beer distributor finds that it sells on average 100 cases a week of regular 12-oz. Budweiser. The demand occurs at a constant rate over a 50-week year. The distributor currently purchases beer every two weeks at a cost of $8 per case. The inventory-related holding cost for the distributor equals 30 percent of the dollar value of inventory per year. Each order placed with the supplier costs the distributor $10.

Assume the supplier is willing to give a 5 percent quantity discount if the distributor orders 600 cases at a time. If the distributor decides to order 600 cases at a time, what is the distributor’s annual total cost (including purchase cost, ordering cost, and holding cost)?

answers options:

$38,767

Explanation / Answer

d = Weekly demand = 100 cases
D = Annual demand = 100 x 50 = 5000 cases
C = $8 per case - discout = $8 x 95% = $7.6
i = 30%
S = ordering cost = $10
Q = order quantity = 600

Total Cost = [Purchase Cost] + {Ordering Cost} + (Holding Cost) = [D.C] + {D.S/Q} + ((Q/2).i.C)

or, Total Cost = [5000 x $7.6] + {5000 x $10 / 600} + ((600/2) x 30% x $7.6) = $38,767

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