# Question

Tim Madsen is the purchasing agent for Computer Center, a large discount computer store. He has recently added the hottest new computer, the Power model, to the store’s stock of goods. Sales of this model now are running at about 13 per week. Tim purchases these computers directly from the manufacturer at a unit cost of $3,000, where each shipment takes half a week to arrive. Tim routinely uses the basic EOQ model to determine the store’s inventory policy for each of its more important products. For this purpose, he estimates that the annual cost of holding items in inventory is 20 percent of their purchase cost. He also estimates that the administrative cost associated with placing each order is $75.

T (a) Tim currently is using the policy of ordering 5 Power model computers at a time, where each order is timed to have the shipment arrive just about when the inventory of these computers is being depleted. Use the Solver version of the Excel template for the basic EOQ model to determine the various annual costs being incurred with this policy.

T (b) Use this same spreadsheet to generate a table that shows how these costs would change if the order quantity were changed to the following values: 5, 7, 9, . . . , 25.

T (c) Use the Solver to find the optimal order quantity.

T (d) Now use the analytical version of the Excel template for the basic EOQ model (which applies the EOQ formula directly) to find the optimal quantity. Compare the results (including the various costs) with those obtained in part (c).

(e) Verify your answer for the optimal order quantity obtained in part (d) by applying the EOQ formula by hand.

(f) With the optimal order quantity obtained above, how frequently will orders need to be placed on the average? What should the approximate inventory level be when each order is placed?

(g) How much does the optimal inventory policy reduce the total variable inventory cost per year (holding costs plus administrative costs for placing orders) for Power model computers from that for the policy described in part (a)? What is the percentage reduction?

T (a) Tim currently is using the policy of ordering 5 Power model computers at a time, where each order is timed to have the shipment arrive just about when the inventory of these computers is being depleted. Use the Solver version of the Excel template for the basic EOQ model to determine the various annual costs being incurred with this policy.

T (b) Use this same spreadsheet to generate a table that shows how these costs would change if the order quantity were changed to the following values: 5, 7, 9, . . . , 25.

T (c) Use the Solver to find the optimal order quantity.

T (d) Now use the analytical version of the Excel template for the basic EOQ model (which applies the EOQ formula directly) to find the optimal quantity. Compare the results (including the various costs) with those obtained in part (c).

(e) Verify your answer for the optimal order quantity obtained in part (d) by applying the EOQ formula by hand.

(f) With the optimal order quantity obtained above, how frequently will orders need to be placed on the average? What should the approximate inventory level be when each order is placed?

(g) How much does the optimal inventory policy reduce the total variable inventory cost per year (holding costs plus administrative costs for placing orders) for Power model computers from that for the policy described in part (a)? What is the percentage reduction?

## Answer to relevant Questions

One of the largest selling items in J.C. Ward’s Department Store is a new model of refrigerator that is highly energy-efficient. About 40 of these refrigerators are being sold per month. It takes about a week for the store ...Reconsider the Blue Skies Airlines example presented in Sec. 18.8. Regarding the flight under consideration, recent experience indicates that the demand for the very low discount fare of $200 is so high that it may be ...The Mountain Top Hotel is a luxury hotel in a popular ski resort area. The hotel always is essentially full during winter months, so reservations and payments must be made months in advance for week-long stays from Saturday ...Reconsider Prob. 18.7-5. The bakery owner, Ken Swanson, now wants you to conduct a financial analysis of various inventory policies. You are to begin with the policy obtained in the first four parts of Prob. 18.7-5 (ignoring ...Speedy Wheels is a wholesale distributor of bicycles. Its Inventory Manager, Ricky Sapolo, is currently reviewing the inventory policy for one popular model that is selling at the rate of 500 per month. The administrative ...Post your question

0