In Scenario 14.2,which option has the lowest annual inventory cost?

A) Current system
B) Option A
C) Option B
D) Option A and Option B have identical annual inventory costs.

Question

In Scenario 14.2,which option has the lowest annual inventory cost?A) Current systemB) Option AC) Option BD) Option A and Option B have identical annual inventory costs.

Caroline Caserio · Accepted Answer

Final Answer : C, Explanation :  To determine the lowest annual inventory cost, we need to calculate the annual inventory cost for each option and choose the lowest one.For the current system:Total demand for Dandy products = 10 territories x 3 units/week x 52 weeks/year = 1,560 unitsTotal demand for Popinjay products = 10 territories x 25 units/week x 52 weeks/year = 13,000 unitsTotal weight of Dandy products = 1,560 units x 0.2 pounds/unit = 312 poundsTotal weight of Popinjay products = 13,000 units x 0.10 pounds/unit = 1,300 poundsTotal weight of shipments every 5 weeks = 312 pounds + 1,300 pounds = 1,612 poundsUPS charge per shipment = $0.75 + 0.33x = $0.75 + 0.33(1,612) = $533.96Number of shipments per year = 52 weeks/year ÷ 5 weeks/shipment = 10.4 shipments/yearTotal annual shipping cost = $533.96 x 10.4 shipments = $5,547.46Total annual holding cost = [(1,560 units + 13,000 units) ÷ 2] x ($350 + $35) x 0.30 = $802,200Total annual inventory cost = Total annual shipping cost + Total annual holding cost = $5,547.46 + $802,200 = $807,747.46For Option A:Total weight of shipments every week = (312 pounds + 1,300 pounds) ÷ 5 = 322.4 poundsUPS charge per shipment = $0.75 + 0.33x = $0.75 + 0.33(322.4) = $107.82Number of shipments per year = 52 weeks/yearTotal annual shipping cost = $107.82 x 52 shipments = $5,605.04Total annual holding cost = [(1,560 units + 13,000 units) ÷ 2] x ($350 + $35) x 0.30 = $802,200Total annual inventory cost = Total annual shipping cost + Total annual holding cost = $5,605.04 + $802,200 = $807,805.04For Option B:Total demand for Dandy products = 10 territories x 3 units/week x 52 weeks/year = 1,560 unitsTotal demand for Popinjay products = 10 territories x 25 units/week x 52 weeks/year = 13,000 unitsTotal weight of one customer order = 1 unit x 0.2 pounds + 10 units x 0.10 pounds = 1.2 poundsTotal weight of shipments every week = (1,560 units x 0.2 pounds + 13,000 units x 0.10 pounds) ÷ 5 + 1.2 pounds = 356.2 poundsFedEx charge per shipment = $7.25 + 0.77x = $7.25 + 0.77(356.2) = $282.95Number of shipments per year = 52 weeks/yearTotal annual shipping cost = $282.95 x 52 shipments = $14,710.40Total annual holding cost = (1,560 units + 13,000 units) x ($350 + $35) x 0.30 = $4,825,500Total annual inventory cost = Total annual shipping cost + Total annual holding cost = $14,710.40 + $4,825,500 = $4,840,210.40Therefore, the lowest annual inventory cost is Option B, eliminating inventories in the territories and aggregating all inventories in a finished goods warehouse at Oshkosh, and replenishing the warehouse once a week.

In Scenario 14.2,which option has the lowest annual inventory cost?

A) Current system
B) Option A
C) Option B
D) Option A and Option B have identical annual inventory costs.

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