Question
The $3.00 inventory holding costs include warehouse space, insurance, and some handling cost. Someone at XYZ has just asked whether anyone has thought about obsolescence,
The $3.00 inventory holding costs include warehouse space, insurance, and some handling cost. Someone at XYZ has just asked whether anyone has thought about obsolescence, shrinkage, or the cost of capital? On top of the setup cost, XYZ has about $24 in direct cash cost invested in each unit produced. XYZs cost of capital is 8%. Obsolescence is not an issue, but further investigation reveals that annual shrinkage could run as high as 5%. After considering this additional information, what is the optimal batch size? How may batches should they produce in a year (round to the nearest reasonable whole number)? What are the annual setup costs? What are the annual holding costs?
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