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Torque Manufacturing forecasts that its production will require 600,000 tons of bauxite over its planning period. Demand for Torque's products is stable over time. Ordering costs amount to an average of $15.00 per order. Holding costs are estimated at $1.25 per ton of bauxite. If Torque uses an inventory quantity of 3,000 tons, what will be the total annual cost of inventory

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Answer:

Total annual cost of inventory is 4875.

Explanation:

The demand for bauxite by Torque manufacturing  (A) = 600000 tons.

It is given that the demand is stable.

The average ordering cost of bauxite (O) = $15 per order.

The cost of holding to bauxite (CP)  = $1.25 per ton.

The economics order quantity (EOQ) = 3000

The total annual cost of inventory = ordering cost  + inventory cost

[tex]\text{Total annual cost} = \frac{A}{EOQ} \times O + \frac{EOQ}{2} \times CP \\[/tex]

[tex]\text{Total annual cost} = \frac{600000}{3000} \times 15 + \frac{3000}{2} \times 1.25 = 4875[/tex]

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