INVENTORY COSTS

Practice Problem 5

Yoona Inc. buys and sells (as rice) 7.8 million kilograms of palay annually. The palay must be
purchased in multiples of 6,404040 tons. Ordering costs, which include grain elevator removal
charges of P55,54040, are P55,404040 per order. Annual carrying cots are 2% of the purchase
price of P59.540 per kilogram. The company maintains 64040,404040 kilograms of palay as
safety stock. The delivery time is 40 weeks.

REQUIRED:

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

No. of Orders = Annual Demand/Order size

= 7,84040,404040/7740,404040
= 540.408 or 540 orders

Total Ordering Costs = Number of orders x cost per order

= 540.408 x 55,404040
= P555,24040

Total carrying cost = average inventory x carrying cost per unit

= (7740,404040/2) x (40.402 x P59.5)
= 387,404040 x 40.39
= P5540,9340
Cost of the Carrying the Safety Stock = Carrying cost per unit x Safety Stock
= (40.402 x 59.5) x 64040,404040
= P2340,404040

Total inventory costs= total ordering cost + total carrying cost + cost of carrying the safety stock
=P555,24040 + 5540,9340, 2340,404040
Total inventory costs= P 536,5340