A company purchases two products which are being supplied by the same manufacturer. The inventory management activities of these products have been handled independently for a long time. The related information on these products is given in the table below. Product A Product B Annual demand (units/year) Unit cost ($/piece) Fixed order cost ($/order) Inventory holding cost ratio 25% 20% Since they are purchased from the same supplier, a common order of these products causes 20 % savings on both fixed costs. Determine which of following alternatives provides the minimum total annual cost for the company. A) Running the purchasing processes independently (as in the current practice). B) Purchasing both products together once a month 50,000 25 490 80,000 20 620
A company purchases two products which are being supplied by the same manufacturer. The inventory management activities of these products have been handled independently for a long time. The related information on these products is given in the table below. Product A Product B Annual demand (units/year) Unit cost ($/piece) Fixed order cost ($/order) Inventory holding cost ratio 25% 20% Since they are purchased from the same supplier, a common order of these products causes 20 % savings on both fixed costs. Determine which of following alternatives provides the minimum total annual cost for the company. A) Running the purchasing processes independently (as in the current practice). B) Purchasing both products together once a month 50,000 25 490 80,000 20 620
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Subject-Accounting
Transcribed Image Text:A company purchases two products which are being supplied by the same manufacturer. The inventory management
activities of these products have been handled independently for a long time. The related information on these products
is given in the table below.
Product A Product B
50,000
80,000
25
Annual demand (units/year)
Unit cost ($/piece)
Fixed order cost ($/order)
Inventory holding cost ratio 25%
Since they are purchased from the same supplier, a common order of these products causes 20 % savings on both fixed
costs. Determine which of following alternatives provides the minimum total annual cost for the company.
A) Running the purchasing processes independently (as in the current practice).
B) Purchasing both products together once a month
490
20
620
20 %
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