FlipCo carries a basic black dress shoe that sells at an approximate constant ra
ID: 374890 • Letter: F
Question
FlipCo carries a basic black dress shoe that sells at an approximate constant rate of 320 pairs of shoes every four months. It costs FlipCo $36 to place an order. The annual holding cost rate is 15%. FlipCo’s current buying policy is to order 90 pairs each time an order is placed at a unit cost of $24 per pair. Other quantity discounts offered by the manufacturer is as follows:
Order Quantity /Price Per Pair
0 - 75 $30
76 - 150 $24
151 - 225 $18
226 or more $12
a) What is the recommended order quantity and total cost associated with the recommended order quantity?
b) What are the annual savings of your inventory policy over the policy currently being used by FlipCo?
Explanation / Answer
a) Annual demand, D = 320*3 = 960
Ordering cost, S = 36
Current level of unit price, P = 24
Inventory carrying cost, H = 24*15% = 3.6
Current order quantity, Q = 90
Total annual inventory cost of current ordering policy = (D/Q)*S + (Q/2)*H + D*P = (960/90)*36 + (90/2)*3.6 + 960*24 = $ 23,586
________________________
Consider the EOQ policy for this price level, P = 24
EOQ = (2DS/H) = (2*960*36/3.6) = 139
Total annual inventory cost of current ordering policy = (D/Q)*S + (Q/2)*H + D*P =(960/139)*36 + (139/2)*3.6 + 960*24 = $ 23,539
________________________
Consider the next price level, P = 18
Inventory carrying cost, H = 18*15% = 2.7
Order quantity = 151
Total annual inventory cost of current ordering policy = (D/Q)*S + (Q/2)*H + D*P =(960/151)*36 + (151/2)*2.7 + 960*18 = $ 17,713
________________________
Consider the next price level, P = 12
Inventory carrying cost, H = 12*15% = 1.8
Order quantity = 226
Total annual inventory cost of current ordering policy = (D/Q)*S + (Q/2)*H + D*P =(960/226)*36 + (226/2)*1.8 + 960*12 = $ 11,876
Total cost is lowest for order quantity = 226. Therefore, recommended order quantity = 226
Total annual inventory cost = $ 11,876
b) Annua savings = Total cost of current policy - total cost of recommended policy = 23586 - 11876 = $ 11,710
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