What is the formula for Total Annual Holding Costs (TAHC)?

What is the formula for Total Annual Holding Costs (TAHC)?

• A. Q/2 * iC
• B. D/Q * S
• C. C * D
• D. S * H

Answer: (A)

The formula for Total Annual Holding Costs (TAHC) is represented as \( \frac{Q}{2} \times iC \). In this formula, \( Q \) stands for the order quantity, \( i \) denotes the inventory carrying cost per unit per year (expressed as a decimal), and \( C \) is the cost per unit of inventory. The rationale behind this formula is that holding costs are incurred for the inventory that a company retains over a period of time. Holding a quantity \( Q \) of items means that, on average, half of this quantity, or \( \frac{Q}{2} \), will be held throughout the year. Thus, multiplying this average inventory level by the carrying cost per unit, \( iC \), gives the total cost associated with holding inventory annually. Understanding this formula is critical for businesses as it helps in making decisions related to inventory management and cost control. The other options, while they may relate to other aspects of inventory management, do not accurately reflect the calculation of total holding costs. For instance, options focusing on ordering costs or different calculations do not pertain directly to the annual cost incurred for holding inventory.

The formula for Total Annual Holding Costs (TAHC) is represented as ( \frac{Q}{2} \times iC ). In this formula, ( Q ) stands for the order quantity, ( i ) denotes the inventory carrying cost per unit per year (expressed as a decimal), and ( C ) is the cost per unit of inventory.

The rationale behind this formula is that holding costs are incurred for the inventory that a company retains over a period of time. Holding a quantity ( Q ) of items means that, on average, half of this quantity, or ( \frac{Q}{2} ), will be held throughout the year. Thus, multiplying this average inventory level by the carrying cost per unit, ( iC ), gives the total cost associated with holding inventory annually.

Understanding this formula is critical for businesses as it helps in making decisions related to inventory management and cost control. The other options, while they may relate to other aspects of inventory management, do not accurately reflect the calculation of total holding costs. For instance, options focusing on ordering costs or different calculations do not pertain directly to the annual cost incurred for holding inventory.