CPIM Practice Exam

How is the Average Ordering Cost per order calculated?

1. Fixed cost multiplied by the number of orders

2. Variable cost divided by total inventory value

3. Fixed cost divided by number of orders plus variable cost

4. Variable cost plus total number of items ordered

The correct answer is: Fixed cost divided by number of orders plus variable cost

The Average Ordering Cost per order is derived from understanding the fixed and variable costs associated with placing orders. This calculation aims to determine the total costs incurred during the ordering process and to spread that total across the number of orders placed. Choosing fixed costs and dividing them by the number of orders allows one to account for the stable costs that do not fluctuate with the volume of orders. By adding the variable costs associated with each order to this total, you get a comprehensive view of what each order costs on average. This means that the formula effectively captures both the consistent costs associated with ordering as well as the variable costs that may change based on the order size or frequency. This method provides a clearer perspective on how much each order actually costs the organization, which enables more informed decisions regarding inventory management and purchasing strategies. Understanding this formula is crucial for optimizing order sizes and frequencies to minimize total costs while meeting demand efficiently.