Detailed Answer
Answer (D) is correct. Valley’s annual ordering costs are $1,600 ($200 per order × 8 orders per year , and the annual carrying costs are $2,500 ($100 per pound × 25 pounds average inventory). Gross annual product purchase cost is $200,000 ($500 per pound × 400 pounds annual usage). Because the differential discount lost is 4% (6% – 2%), annual discounts lost equal $8,000 ($200,000 × 4%). If the purchasing manager places 8 orders of 50 pounds each, Valley’s total cost can be calculated as follows: Annual ordering costs $ 1,600 Annual carrying costs 2,500 Annual discounts lost 8,000
Total cost $12,100