Kris Lee, the owner and manager of the Quality Hardware Store, is reassessing his inventory policy for hammers. He sells an average of 50 hammers per month, so he has been placing an order to purchase 50 hammers from a wholesaler at a cost of $20 per hammer at the end of each month. However, Kris does all the ordering for the store himself and finds that this is taking a great deal of his time. He estimates that the value of his time spent in placing each order for hammers is $75.
(a) What would the unit holding cost for hammers need to be for Kris’ current inventory policy to be optimal according to the basic EOQ model? What is this unit holding cost as a percentage of the unit acquisition cost?
T (b) What is the optimal order quantity if the unit holding cost actually is 20 percent of the unit acquisition cost? What is the corresponding value of TVC = total variable inventory cost per year (holding costs plus the administrative costs for placing orders)? What is TVC for the current inventory policy?
T (c) If the wholesaler typically delivers an order of hammers in 5 working days (out of 25 working days in an average month), what should the reorder point be (according to the basic EOQ model)?
(d) Kris doesn’t like to incur inventory shortages of important items. Therefore, he has decided to add a safety stock of 5 hammers to safeguard against late deliveries and larger-thanusual sales. What is his new reorder point? How much does this safety stock add to TVC?