The total cost will include the lost discount (from ordering at the 2% discount level instead of at the 6% discount level), ordering costs and carrying costs. Lost discount cost: The company purchases 400 pounds at $500 per pound per year, at a total cost of $200,000 (400 × $500). The cost of the lost discounts is the difference between 6% and 2% of $200,000, i.e., 4% multiplied by $200,000. $200,000 × .04 = $8,000. Ordering cost: $200 per order × 8 orders per year = $1,600. Carrying cost: Each order consists of 50 pounds. It is assumed Valley Inc will use those 50 pounds down to zero and then receive another order of 50. We must also assume they will use the amount in each order at a steady rate. Therefore, the average number of pounds in inventory throughout the year will be the average of 50 and 0, which is (50 + 0) / 2, or 25 pounds. The carrying cost of $100 per pound is multiplied by these 25 pounds, and the cost is $2,500. The total cost will be $8,000 + $1,600 + $2,500 = $12,100.
This is the inventory ordering and carrying costs, but it does not include discounts lost. The total cost of ordering and carrying the inventory, including discounts lost, will include the lost discount (from ordering at the 2% discount level instead of at the 6% discount level), ordering costs and carrying costs.
This is the ordering cost only. The total cost of ordering and carrying the inventory, including discounts lost, will include the lost discount (from ordering at the 2% discount level instead of at the 6% discount level), ordering costs and carrying costs.
This is the inventory ordering costs plus carrying costs, but the carrying costs are calculated incorrectly. They are calculated using the number of units ordered each time an order is placed. Furthermore, this answer does not include discounts lost. The inventory carrying costs should be calculated using the average number of units in inventory throughout the year, not the amount ordered each time an order is placed.
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