Question

Floral Beauty, Inc., is a large floral arrangements store located in Asheville Mall. Bridal Lilies, which are a specially created bunch of lilies for bridal bouquets, cost Floral Beauty $19 each. There is an annual demand for 22,000 Bridal Lilies. The manager of Floral Beauty has determined that the ordering cost is $85 per order, and the carrying cost, as a percentage of the unit cost, is 14%. Floral Beauty is now considering a new supplier of Bridal Lilies. Each lily would cost only $17.50, but to get this discount, Floral Beauty would have to buy shipments of 2,000 Bridal Lilies at a time. Should Floral Beauty use the new supplier and take this discount for quantity buying?

Just need

e) What is the annual holding cost for the new supplier (when purchasing 3,000 each order)?

f) What is the total annual inventory cost (including purchase cost) for the new supplier (when purchasing 3,000 each order)?

Answer 1

e) Annual holding cost is given by the below formula

Annual Holding Cost = Unit Cost*carrying cost percentage*Order quantity*0.5

Annual Holding Cost = 17.5*0.14*3000*0.5 = $3675

f) Total Annual Inventory Cost = Annual Holding Cost + Annual Ordering Cost + Annual Purchase Cost

Annual Holding Cost = $3675

Annual Ordering Cost = Number of orders*Ordering Cost = Annual Demand/Order Quantity*Ordering Cost

Annual Ordering Cost = 22000/3000*85 = $623.33

Annual Purchase Cost = Annual Demand*Purchase Cost = 22000*17.5 = $385000

Total Annual Inventory Cost = 3675+623.33+385000 = $389298.33