How to Calculate Total Inventory Cost for Napkins?

What is inventory cost?

Answer:

Inventory costs include the costs of purchasing, storing, and managing inventory across the ecommerce supply chain. Inventory costs go beyond the initial purchase and include storage costs as well as the costs of holding unsold finished goods.

The total inventory cost for napkins can be calculated using the Economic Order Quantity formula. In this case, a restaurant currently uses 62,500 boxes of napkins each year at a constant daily rate.

The formula to calculate the Economic Order Quantity (EOQ) is:

EOQ = √(2 * A * O / C)

Where:

A = Boxes of napkins used in a year = 62,500

O = Ordering cost of napkins = $200.00 per order

C = Annual carrying cost for one box of napkin = $1.00

By substituting the values into the formula, we get:

EOQ = √(2 * 62,500 * 200 / 1)

EOQ = 5,000 Boxes

The total annual inventory cost will be:

Optimal order quantity × Annual carrying cost per box

= 5,000 × $1.00

= $5,000

This means that the total inventory cost for napkins for the restaurant using the Economic Order Quantity is $5,000, which is a cost-effective solution for managing their napkin inventory.