Total Annual Inventory Cost Formula

TC = PD + HQ/2 + SD/Q

where,

TC is the total annual inventory cost

P is the price per unit paid

D is the total number of units purchased in a year

H is the holding cost per unit per year

Q is the quantity ordered

S is the fixed cost per order

How to Caculate Total Yearly inventory cost

P is the price per unit paid-assume $5 per unit.

D is the total number of units purchased in a year-assume 3,500 units.

H is the holding cost per unit per year-assume $3 per unit per annum.

Q is the quantity ordered each time an order is placed-initially assume 350 gallons per order.

S is the fixed cost of each order-assume $15 per order.

Calculating TC with these values,

we get a total inventory cost of $18,175 for the year.