Problem: A manufacturer of wooden furniture carries in its warehouse only one type of inventory: lumber. Following are various costs that may or may not be associated with the inventory:
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Rent on Warehouse
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$23,000/year
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Wages & salaries, purchasing dept
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$80,000/year
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Inventory Taxes
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$18,000/year
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Cost of capital
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14%
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Value of Average Inventory on hand
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$680,000
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Insurance on warehouse contents
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$3,500/year
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Operating supplies, purchasing department
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$1,400/year
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Operating budget, production control dept
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$160,000/year
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Expenditure on inventory
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$3,400,000/year
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Cost of a 12 foot, 1 by 4 inch board
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$1
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Overhead, purchasing depart
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$25,000/year
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Wages & salaries, warehouse
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$48,000/year
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Overhead, warehouse
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$8,000/year
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Miscellaneous Expenditures, warehouse
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$4,200/year
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1) What is the inventory carry cost rate (I) for the total inventory stored?
2) What is the average cost of processing a purchase order (S)? Assume that 3,000 purchase orders per year are processed.
3) What is the EOQ for 1 by 4 inch boards? Assume that 30,000 of these boards are used annually.
4) What is the annual cost of capital invested in 1 by 4 inch boards? (Ignore safety stock)