Question

Clarke’s Shoe Factory has an annual demand of 5,000 for a particular shoe style. One of their suppliers made an irresistible offer on shoelaces for the popular shoe. Shoelaces usually cost 10 cents each; however, if Clarke’s buy 10,000 laces in each order for the upcoming year, they will pay only 5 cents each; and if they buy 50,000 in each order, you will pay only 3 cents each. It costs $15 to place an order. Carrying cost for each shoelace is 20% of purchase price.

a. Showing your work, determine which of these two quantities represents the most optimal order quantity?

b. Explain the response you gave justifying ALL formula selections and calculations.

Answer 1

	Annual shoe Demand	5,000
	Annual shoe lace demand	10,000
	Order Quantity	10,000		50,000
	Cost of shoe lace	500	=10000*0.05	300	=10000*0.03
	order cost	15		3	=15/5	Since no order is required for 5 years
	Carrying Cost (Ending inventory*purchase price*% of purcahse price)	-		240	=40000*0.03*20%
	Total cost	515		543
	Option-1 10,000 represents the most optimal order quatity.
	Since if we compare $515 is less than %543 in case of 50,000 units order.
	The annual demand is only 10,000 and it would be costly to store the inventory for 5 years if order is placed for 50,000 units.