C is corrent. The annual cost of carrying inventory is the average inventory level times the cost per unit of inventory times the cost of capital. It is calculated as follows: Average inventory level x Unit cost x Cost of capital = (order size / 2) x $5 x .12 = (500 / 2) x $5 x .12 = $150.
A is incorrect. This answer is obtained by using the total annual quantity rather than the average inventory level and by neglecting to multiply by the unit price: = Annual quantity x .12 = 1,500 x .12 = 180.
B is incorrect. This answer is obtained by using the total annual quantity rather than the average inventory level: = 1,500 x $5 x .12 = $900.
D is incorrect. This answer is obtained by using the order size rather than the average inventory level: = Order size x $5 x .12 = 500 x $5 x .12 = $300.
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