what is the sum of their annual ordering and holding costs?

Question

Millennium Liquors is a wholesaler of sparkling wines. Their most popular product is the French Bete Noire which is shipped directly from France. Weekly demand is for 40 cases. Millennium purchases each case for $110, there is a $250 fixed cost for each order (independent of the quantity ordered) and their annual holding cost is 25 percent.

Millennium is offered a 5.00% discount if they purchase at least 1,000 cases. If they decide to take advantage of this discount, what is the sum of their annual ordering and holding costs?

Answer 1

To solve this problem, let's break it down step by step:

1. First, let's calculate the annual demand:
2. Weekly demand = 40 cases
3. Annual demand = 40 * 52 = 2,080 cases
4. With the discount, the new purchase price per case is:
5. $110 * (1 - 0.05) = $104.50 per case
6. The order quantity is 1,000 cases (to get the discount)
7. Now, let's calculate the annual ordering cost:
8. Number of orders per year = 2,080 / 1,000 = 2.08 orders
9. Annual ordering cost = 2.08 * $250 = $520
10. Next, let's calculate the annual holding cost:
11. Average inventory = 1,000 / 2 = 500 cases
12. Annual holding cost = 500 * $104.50 * 0.25 = $13,062.50
13. The sum of annual ordering and holding costs:
14. $520 + $13,062.50 = $13,582.50

Therefore, the sum of Millennium's annual ordering and holding costs if they take advantage of the discount is $13,582.50.