A North Face retail store in Chicago sells 120 jackets per week. Each jacket cos

Question

A North Face retail store in Chicago sells 120 jackets per week. Each jacket costs the store $100 and the company has an annual holding cost of 20 percent. The fixed cost of a replenishment order (including transportation) is $100. The store currently places a replenishment order every month for 550 jackets.

For all questions that follow, round your answers to two (2) decimal places.

A- What is the annual holding cost?  

B- What is the annual ordering cost?  

C- What is the annual total cost including the purchasing cost?

D- If the retail store wants to minimize the annual total inventory cost, what order size do you recommend?

E- How much would the optimal order quantity reduce the annual total inventory cost relative to the current policy?

Explanation / Answer

A- Annual holding cost=550/2*0.20*12=$660

B- Annual ordering cost= $100*12=$1200

C-Annual total cost=$660+$1200+$550*12*$100=$661,860

D-Optimal order= (2*52*120*100)/20=1,248,000/20=249.79=250

E=Total inventory cost =250/2*0.20+6240/250*100+6240*100=$25+$2500+$624,000= $626,525

Saving due to new policy=$661,860-$626,525=$35,335

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