Merrimack Industries sells its output in a perfectly competitive market. Which of

a) Total annual inventory cost (including purchase cost) for the current supplier = $421,154

b) Annual holding cost for the new supplier (when purchasing 3,000 each order) =  $3,675

c) Total annual inventory cost = $389,298

d) Since the total cost has reduced, Flora Beauty should choose the new supplier option.

Explanation:

Annual demand, D = 22,000

Unit cost, C = $19

Ordering cost, K = $85

Unit carrying cost, h = 14% of C

h = 0.14*19 = $2.66

(a)  Total annual inventory cost for the current supplier,

...........(1)

Economic order quantity,Q'

Su bstitute Q' and other parameters into Tc

(b)

Q = 3000

C = $17.50

h = 0.14*17.50 = 2.45

Annual holding cost for the new supplier = (Q/2)*h = (3000/2)*2.45 = $3,675

(c)

Total annual inventory cost = (D*C) + (Q/2)*h + (D/Q)*K

Total annual inventory cost = (22000*17.5) + (3000/2)*2.45 + (22000/3000)*85

Total annual inventory cost for the new supplier = $389,298

d)

Since the total cost has reduced, Flora Beauty should choose the new supplier option.