In: Operations Management

**Joe's Drones is attempting to minimize total inventory
cost and maximize profits this year. Each drone costs Joe $100 to
buy and he sells them for $150 each. Joe’s mom helps with the
purchasing and ordering and he pays her $100 for every order she
places. Joe leases warehouse space from a friend where he can store
his inventory and he pays $2.50 per month for each board that he
has to store to use this space.**

**Drones are a hot item and Joe expects to sell 2,500 of
them this year. He is currently ordering once a month, but he
thinks that he can save money if he optimizes his order
quantity.**

a) If Joe continues to order once a month this year, what will his Total Annual Cost of Inventory be?

b) Assuming Joe sells everything that he orders, what will his annual profit be if he continues to order once a month

c) What quantity should Joe to order that would minimize Total Cost of Inventory (not Total Cost - the is Inventory only)?

d) How much will Joe’s annual profit change if he orders based on the EOQ rather than ordering once a month?

- Annual demand = 2500

Order quantity if it is ordered once a month = 2500 / 12 = 208.33

Annual unit inventory holding cost = $2.50 / month x 12 months =$30

Ordering cost =$100 per order

Annual ordering cost = Ordering cost x Number of orders = Ordering cost x Number of orders = $100 x 12 = $1200

Annual inventory holding cost

= Annual unit inventory holding cost x average inventory

= $30 x Order quantity/ 2

= $30 x 208.33/2

= $3124.95

Therefore, total annual cost of inventory

= annual ordering cost + annual inventory holding cost

= $1200 + $3124.95

= $4324.95

TOTAL ANNUAL COST OF INVENTORY = $4324.95 |

- Annual profit for Joe

= Annual demandx ( Selling price – Purchase price ) – total annual cost of inventory

= 2500 x ( 150 – 100 ) – 4324.95

= $ 2500 x 50 - $4324.95

= $125000 - $4324.95

= $120675.05

ANNUAL PROFIT FOR JOE = $120675.05 |

- The economic order quantity that should minimize total cost of inventory

= Square root ( 2 x Annual orderingcost x Annual demand/ Annual unit holding cost )

= Square root ( 2 x 100 x 2500 /30 )

= 129.09 ( 129 rounded to nearest whole number )

JOE SHOULD ORDER 129 DRONES |

- Annual ordering cost = Ordering cost x Number of orders = Ordering cost x Annual demand/Order quantity = $100x 2500/129 = $1937.98

Annual inventory holding cost = Annual unit holding cost x Average inventory = Annual inventory holding cost x Order quantity /2 = $30 x 129/2 = $1935

Total annualinventory related cost = $1937.98 + $1935 = $3872.98

Reduction in inventory related cost

= Annual inventory related cost ( for ordering once a month ) – annual inventory related cost ( order quantity = 129 drones )

= $4324.95 - $3872.98

= $451.97

With reduction in inventory related cost by $451.97, profit will increase by $451.97

JOE’S ANNUAL PROFIT WOULD CHANGE ( INCREASE) = $451.97 |

Select the correct economic criterion (maximize profit, minimize
cost, maximize benefit) for each of the following scenarios:
A services contractor received a fixed price contract to install
and maintain IT equipment for the city of San Diego. What is the
economic criteria for the services contractor?
A couple has budgeted $15,000 for their wedding. What is the
economic criterion for the couple planning their wedding?
A sandwich shop has found that decreasing the price of a sandwich
increases sales but...

A monopoly will maximize its profits and minimize its losses
when
A. Price of the product = the Demand for the Product
B. MR=MC
C. MC=ATC
D. AVC = Marginal Revenue

If you were attempting to maximize your net income, which
inventory cost flow assumption would you choose? Why? What
conditions must exist for this method to produce the highest net
income? When perpetual inventory records are kept, the results
under the FIFO and LIFO methods are the same as they would be in a
periodic inventory system.” Do you agree? Explain.

1. The overall goal of the financial manager is to:
a. minimize total costs.
b. maximize net income.
c. maximize earnings per share.
d. maximize shareholder wealth.
2. Sustainable Growth Rate You have located the
following information on Rock Company: debt ratio = 49.5%, capital
intensity ratio = 2.63 times, profit margin = 27%, and dividend
payout ratio = 44%. What is the sustainable growth rate for Rock?
(Do not round intermediate steps.)
1. 3.92%
2. 12.85%
3. 15.12%
4....

For a firm to maximize profit, it must minimize the cost of
producing whatever quantity it produces. Use the isocost and
isoquant tools to present a firm that is choosing the optimal
levels of labor and capital (i.e., tools) to produce a certain
quantity and a certain cost. Then, show in your diagram how this
firm would respond if it were to expand and spend more on its
inputs, assuming it is best for the firm to become more “capital...

Nonprofit, or not-for-profit, firms:
Select one:
a. minimize cost rather than maximize profit.
b. maximize revenue instead of profit.
c. pursue profit as their main goal despite their name.
d. have no incentive to produce efficiently.
e. often pursue goals other than profit maximization.

Maximize output with a given total outlay (costs): set up a
Lagrangian, etc... Then, Minimize costs when required q is given in
a perfectly competitive markets: set up a Lagrangian and then show
FOC, SOC, maybe show a graph.

1..A pure monopolist will maximize profits by
producing at that output where price and marginal cost are
equal.
A)True
B)False
2..In the long run a pure monopolist will maximize
profits by producing that output at which marginal cost is equal
to:
A)average total cost.
B)marginal revenue.
C)average variable cost.
D)average cost.
3..Which is not true for a monopolistically
competitive industry?
A).Firms tend to operate with excess capacity.
B). Each firm faces a downward-sloping demand curve.
C). These firms earn zero...

marginal revenue equals marginal cost to maximize total
revenue

1. A multi-plant monopolist will maximize profits where
a. the marginal revenue in each plant is equal to the marginal
cost in this plant
b. the marginal revenue of monopoly is equal to the marginal
cost of each plant
c. average cost is at its minimum in both plants
d. none of the above

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