INVENTORY COSTS

Practice Problem 1

Aga Company buys and sells (as rice) 7.8 million kilograms of palay annually. The palay must
be purchased in multiples of 6,000 tons. Ordering costs, which include grain elevator removal
charges of P11,500, are P15,000 per order. Annual carrying cots are 2% of the purchase price
of P19.50 per kilogram. The company maintains 600,000 kilograms of palay as safety stock.
The delivery time is 4 weeks.

REQUIRED:

What are the total inventory costs, including the costs of carrying the safety stock?

No. of Orders = Annual Demand/Order size

= 7,800,000/774,000
= 10.08 or 10 orders

Total Ordering Costs = Number of orders x cost per order

= 10.08 x 15,000
= P151,200

Total carrying cost = average inventory x carrying cost per unit

= (774,000/2) x (0.02 x P19.5)
= 387,000 x 0.39
= P150,930
Cost of the Carrying the Safety Stock = Carrying cost per unit x Safety Stock
= (0.02 x 19.5) x 600,000
= P234,000

Total inventory costs= total ordering cost + total carrying cost + cost of carrying the safety stock
=P151,200 + 150,930, 234,000
Total inventory costs= P 536,130