Question

2. Assume that Wal-Mart buys a particular Television set for $95. The cost of placing an order for a shipment of TVs is $25. The cost of keeping inventory for Wal-Mart is 20% per year. They expect to sell an average of 600 TV sets in a year, at a fairly steady rate. How many sets should they buy to minimize their total annual cost? Given your answer, would you think it reasonable to change it to a more convenient number? If so, to what and why? By how much would this change the total cost? (0.4 points)

Answer 1

Answer:

EOQ = 40 (rounded from 39.74) will minimize the annual inventory cost.

We round to a whole units as there is impossible to purchase 0.74 of a TV

Inventory cost at EOQ 1,135 dollars

Explanation:

we will use the economic order quantity to solve for the order size:

$Q_{opt} = \sqrt{\frac{2DS}{H}}$

D = annual demand 600

S= setup cost = ordering cost 25

H= Holding Cost 19.00

$Q_{opt} = \sqrt{\frac{2 \times 600 \times 25}{19}}$

EOQ = 39.73597071 = 40

The cost will be:

600/40 = 15 order per year x 25 = 375

holding cost: 40 x 19 = 760

total 760 + 375 = 1,135