CPIM Practice Exam

How is the annual order cost calculated?

1. Inventory level multiplied by cost per item

2. Number of orders times cost per order

3. Product usage divided by order size

4. Total inventory times average unit cost

The correct answer is: Number of orders times cost per order

The annual order cost is derived from the number of orders placed within a year multiplied by the cost incurred for each order. This calculation effectively captures the total expenses associated with ordering inventory over the year, which can include costs like shipping, handling, and receiving. By focusing on the number of orders and the associated costs, businesses can determine how much they spend on replenishing inventory, which is crucial for inventory management and cost control strategies. The other choices provided relate to different aspects of inventory management. For example, calculating inventory levels or average unit costs focuses more on valuation rather than the specific costs incurred by ordering processes. Understanding the distinct roles these calculations play in supply chain and inventory management will help in making informed purchasing and operational decisions.