CPIM Practice Exam

What is the formula for calculating the annual order cost?

1. (Annual demand x cost per order) / carrying cost rate

2. (Annual demand x cost per order) / lot size quantity

3. (Lot size quantity x cost per unit) / annual demand

4. (Annual demand x carrying cost rate) / cost per order

The correct answer is: (Annual demand x cost per order) / lot size quantity

The formula for calculating the annual order cost is typically derived from the relationship between ordering costs, annual demand, and lot size. When considering how often orders need to be placed based on total annual demand and a specific lot size, the annual order cost is calculated by dividing the total annual demand by the lot size quantity to determine the number of orders placed per year. This number is then multiplied by the cost per order to arrive at the annual order cost. In this case, the correct option emphasizes that with annual demand known and defined in terms of lot size quantity, one can accurately assess how many orders are made annually and thus, what the total ordering costs will be. This method captures the essence of how ordering strategies impact financial planning and inventory management within a supply chain context. Understanding this calculation is important for balancing order frequency with storage costs, which can contribute to overall efficiency and cost savings.