Question

The Bridal Supply Shoppe keeps an inventory of ribbons, for which the annual demand is 11,000 rolls. Each roll costs $12 and the order cost is $55 per order. Carrying costs are $1.21 per roll per year. The Bridal Supply Shoppe currently bases it orders on the economic order quantity. Recently, the wholesaler of the ribbons, in an attempt to shift some of its inventory to the Bridal Shoppe, has pointed out the high ordering costs ( $55 ) and suggested that orders be placed only once each year. As an incentive, the wholesaler offers a 4% discount if the annual ordering policy is adopted.

REQUIRED:

a)         What is the EOQ?

b)         On the basis of the offer, should the Bridal Supply Shoppe change its current         ordering policy? Show all calculations on which you base your answer.

Answer 1

Total annual demand (A) = 11000 rolls.

Order cost (O) = $ 55 per order

Carrying costs (C) = $1.21 per roll per year

The economic oder quantity may be calculated as follows-

EOQ =

=

=

=1000 rolls

a) EOQ is 1000 rolls.

b) If the Bridal Supply Shoppe keeps an inventory based on EOQ, toal anuual cost would be-

Total cost of rolls per year = 11000 * 12 = 132000 $

no. of orders per year = 11

Total ordering cost = 11 * 55 = 605 $

Average inventory = 500 units (i.e 1000/ 2)

Total carrying cost = 500 * 1.21 = 605 $

Total cost = 132000 + 605+ 605 = 133210 $

If the Bridal Supply Shoppe buys an all inventory in one oder, toal anuual cost would be-

Discount availed = 4 %

Total annual cost = 132000 - 4% of 132000

=132000 - 5280 = 126720 $

Total ordering cost = $ 55

Average inventory = 5500 ( 11000 / 2)

carrying cost = 5500 * 1.21 = 6655 $

Total annual cost ( No EOQ) = 126720 + 55+ 6655 = $ 133430

Total cost (EOQ ) =133210 $

Bridal Supply Shoppe should not change its current EOQ ordering policy.

Hope it helps!