Question

Monthly demand = 2,400

Cost of capital = 25%
Cost to place an order = $400
Storage space cost = 3%
Value of one unit of inventory
Inventory service cost = 2%
Lead time = 5 days
Inventory risk = 1%
Days in a year = 360
= $100
What is the inventory carrying cost percentage?
What is the replenishment order quantity?
What is the reorder point?
What is the total annual cost?

Answer 1

The best production method based on the provided costs is Method 1, as it offers the lowest total cost both before and after the labor cost increases. With a labor cost of $100/unit, Method 1 costs $9,000; when labor cost rises to $200/unit, its total cost is $14,000.

Step-by-step explanation:

The subject matter at hand concerns determining the most cost-effective production method based on the costs of labor and capital for a given company scenario. To find the best method, we need to calculate the total cost for each method:

• Method 1: (50 units of labor × $100/unit) + (10 units of capital × $400/unit) = $9,000
• Method 2: (20 units of labor × $100/unit) + (40 units of capital × $400/unit) = $18,000
• Method 3: (10 units of labor × $100/unit) + (70 units of capital × $400/unit) = $29,000

With the initial labor cost of $100/unit, Method 1 is the best production method since it has the lowest total cost of $9,000. If the cost of labor rises to $200/unit, we have to reevaluate:

• Method 1: (50 units of labor × $200/unit) + (10 units of capital × $400/unit) = $14,000
• Method 2: (20 units of labor × $200/unit) + (40 units of capital × $400/unit) = $18,000
• Method 3: (10 units of labor × $200/unit) + (70 units of capital × $400/unit) = $30,000

If the cost of labor increases to $200/unit, Method 1 remains the best production method as it still has the lowest total cost, even with the increased labor cost.