(Identification of inventory costs) Tyler Tubing’s management has been evaluating company policies with respect to control of costs of corrugated metal, one of the firm’s major component materials. The firm’s controller has gathered the following financial data, which may be pertinent to controlling costs associated with the metal tubing:
|
Ordering Costs |
|
|
Annual salary of purchasing department manager |
$61,500.00 |
|
Depreciation of equipment in purchasing department |
$42,300.00 |
|
Cost per order for purchasing department supplies |
$0.90 |
|
Typical phone expense per order placed |
$6.06 |
|
Monthly expense for heat and light in purchasing department |
$700.00 |
|
Carrying Costs |
|
|
Annual depreciation on materials storage building |
$30,000.00 |
|
Annual inventory insurance premium (per dollar of inventory value) |
$0.15 |
|
Annual property tax on materials storage building |
$7,500.00 |
|
Obsolescence cost per dollar of average annual inventory |
$0.16 |
|
Annual salary of security officer assigned to the materials storage building |
$38,000.00 |
a. Which of the ordering costs should Tyler Tubing’s controller consider in performing short run decision analysis? Explain.
b. Which of the carrying costs should Tyler Tubing’s controller consider in performing short run decision analysis? Explain.