Wocket Enterprises is considering three options in obtaining fasteners which they sell to construction contractors. The quantity of fasteners that they sell every month is 2000 units.
Wocket keeps an inventory of a number of different products and has figured out that its carrying costs are approximately 25 percent of the value of the goods in inventory.
• The first alternative is to order the fasteners from a Berea company, at a cost of $ 0.40 each. The cost of placing an order with this supplier is $ 250.
• The second alternative is to order the fasteners from a foreign supplier (Taiwan) at a lower cost of $ 18 per box; each box contains 50 fasteners. However, this price is not available for quantities lower than 300 boxes; actually the supplier will refuse to ship quantities lower than 300 boxes. The cost of placing an order is $ 750 per order.
• The third alternative is to subcontract the manufacturing of the fastener to Pocket Inc, the company owned by the son of the owner of Wocket Enterprises. He would deliver the fasteners as they are made, gradually replenishing the inventory of Wocket Enterprises.
The cost would be $ 0.39 per piece, and the order cost would be much lower at $ 50. The machine on which the fastener would be made operates at a rate of 100 fasteners an hour and works 12 hours a day, 5 days a week, 50 weeks per year.
1. If Wocket chose to order from the Berea supplier what quantity should it order and what would be the total inventory costs for this alternative be. I know the answer is 10954 and $1095.44 but don't understand what formula they are using to come up with these answers. Please show how they got these answers.