R. C. Barker makes purchasing decisions for his company. One product that he buys costs $50 per unit when the order quantity is less than 500. When the quantity ordered is 500 or more, the price per unit drops to $48. The ordering cost is $30 per order and the annual demand is 7,500 units. The holding cost is 10 percent of the purchase cost. If R. C. orders 500 units each time he places an order, what would the total annual holding cost be?

(A) 300

(B) 306

(C) 500

(D) 200

(E) None of the above

The correct answer is E.

Explanation:

Giving the following information:

One product that he buys costs $50 per unit when the order quantity is less than 500. When the quantity ordered is 500 or more, the price per unit drops to $48. The ordering cost is $30 per order and the annual demand is 7,500 units. The holding cost is 10 percent of the purchase cost.

Purchase cost per order = 500 units*48 + $30 = $24,030

Holding cost = 24030*0.10 = $2,403

Number of orders = 7500/500 = 15

Holding cost = 2403*150 = $36,045