Multiplying the annual number of purchase orders by the cost per order calculates the _____________?
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Answer: C. annual relevant ordering costs
Explanation
Multiplying the annual number of purchase orders by the cost per order determines annual relevant ordering costs. These costs vary directly with the number of orders placed rather than the size of the inventory. Minimizing these costs is a primary objective of inventory management models. Inventory costs include ordering costs, carrying costs, and stockout costs. Ordering costs cover the administrative and shipping expenses associated with processing a purchase order. Carrying costs represent the expense of holding inventory in a warehouse.
Supply chain managers use economic order quantity models to balance ordering costs against carrying costs. Placing frequent small orders increases annual ordering costs while reducing warehouse holding costs. Finding the optimal order frequency minimizes total inventory expenses. Carrying costs depend on average inventory levels and holding expenses rather than order frequency. Irrelevant costs do not change across the alternatives being evaluated by decision-makers.
- Subject
- Accounting and Finance
- Category
- Accounting
- Topic
- —
- Difficulty
- medium
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