I am stumped on how they are coming up with this one. Please someone help to explain this. Thank you in advance:
Question:
A company sells 1,500 units of a particular item each year and orders the items in equal quantities of 500 units at a price of $5 per unit. No safety stocks are held. If the company had a cost of capital of 12%, its annual cost of carrying inventory is:
Answer: $150
Calculated as follows: Average inventory level x Unit Cost x Cost of Capital
(500/2) x 5 x .12
How is it that they are coming up with the Average inventory level of 250?