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A wine shop sells 210 bottles of a specialty wine each month. The specialty wine is purchased from a winery in France, which sells wine bottles in cases, with each case containing 50 bottles. The winery charges the wine shop $19.70 per bottle and an ordering cost of $250 per order. The wine shop's annual inventory holding cost percentage is 40%.

If the wine shop's order quantity is 2 cases, what is its annual cost of ordering and holding inventory?

Answer :

Final answer:

The annual cost of ordering and holding inventory for the wine shop is $7126.80.

Explanation:

To calculate the wine shop's annual cost of ordering and holding inventory, we need to consider both the ordering cost and the holding cost. The ordering cost is $250 per order and the holding cost is 40% of the value of the inventory. Let's calculate each component:

  1. Ordering Cost: The shop orders 2 cases of wine each time, and each case contains 50 bottles, so the number of bottles per order is 2 cases * 50 bottles per case = 100 bottles. Therefore, the ordering cost per bottle is $250 / 100 bottles = $2.5.
  2. Holding Cost: The value of the inventory is the number of bottles in stock multiplied by the cost per bottle. The shop sells 210 bottles per month, so the average inventory is half of that, which is 210 bottles / 2 = 105 bottles. The holding cost per bottle is 40% of the cost per bottle, so it is 0.4 * $19.7 = $7.88.

To calculate the annual cost, we multiply the ordering cost per bottle by the number of bottles sold in a year (210 bottles * 12 months = 2520 bottles) and add it to the holding cost per bottle multiplied by the average inventory (105 bottles). Doing the calculations:

  • Annual ordering cost = $2.5/bottle * 2520 bottles = $6300
  • Annual holding cost = $7.88/bottle * 105 bottles = $826.80

The annual cost of ordering and holding inventory for the wine shop is $6300 + $826.80 = $7126.80.

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