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12 February, 10:10

A retail store sells 500 jackets each month. Each jacket costs the store $99, and for holding cost purposes, the store estimates capital costs of 12%, storage costs of 10%, and risk costs of 3%. Furthermore, the store incurs annual operating expenses for purchasing in the amount of $1080 in addition to $10 for inspecting and receiving each order. If the store currently places a replenishment order of 650 jackets each time, what is the total annual holding and ordering cost? (Round your answer to the nearest integer)

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  1. 12 February, 13:42
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    1) The total annual holding cost is $144,788

    2) The annual ordering cost is $1170

    Step-by-step explanation:

    The parameters given are;

    The number of jackets sold per month = 500 jackets

    The cost of each jacket = $99

    The capital cost = 12%

    The storage cost = 10%

    The risk cost = 3%

    Annual purchasing expenses = $1080

    Cost for inspecting and receiving each order = $10

    Number of jackets contained in each order = 650 jackets

    1) Therefore, we have;

    Number of jackets sold per annum = 500 * 12 = 6,000

    Number of times jackets are ordered per year = (Number of jackets sold per annum) / (Number of jackets sold per annum)

    Number of times jackets are ordered per year = 6000/650 = 9.23≈9 orders

    Total cost of order = 9 * 650 * 99 = $579,150

    Given that the total annual holding cost = (12 + 10 + 3) % of ordering cost

    Therefore, the total annual holding cost = 25% of ordering cost

    the total annual holding cost = 0.25 * 579,150

    The total annual holding cost = $144,787.5 ≈ $144,788

    2) The annual purchasing operating expense = $1080

    The total cost of inspecting the 9 orders = 9 * $10 = $90

    The annual ordering cost = $1080 + $90 = $1170
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