Question

The A&M Hobby Shop carries a line of radio-controlled model racing cars. Demand for the cars is assumed to be constant at a rate of 50 cars per month. The cars cost $80 each, and ordering costs are approximately $15 per order, regardless of the order size. The annual holding cost rate is 20%.

(a)

Determine the economic order quantity and total annual cost (in $) under the assumption that no backorders are permitted. (Round your answers to two decimal places.)

Q* = TC= $

(b)

Using a $45 per-unit per-year backorder cost, determine the minimum cost inventory policy and total annual cost (in $) for the model racing cars. (Round your answers to two decimal places.)

Q* = TC= $

(c)

What is the maximum number of days a customer would have to wait for a backorder under the policy in part (b)? Assume that the Hobby Shop is open for business 300 days per year. (Round your answer to two decimal places.)

days

(d)

Would you recommend a no-backorder or a backorder inventory policy for this product? Explain.

Yes, the maximum wait is less than a week and the backorder case has a lower cost than the EOQ case.Yes, the maximum wait is over a week long, but the cost savings of the backorder case is large enough to justify a long wait.     No, the maximum wait is over a week long and the EOQ case has a lower cost than the backorder case.No, the maximum wait is over a week long, which does not justify the cost savings of the backorder case.No, the maximum wait is less than a week but the EOQ case has a lower cost than the backorder case.

(e)

If the lead time is six days, what is the reorder point for both the no-backorder and backorder inventory policies? (Round your answers to two decimal places.)

EOQ r= Backorder r=

Answer 1