3. One of the top-selling items in the container group at the museum\'s gift sho

Question

3. One of the top-selling items in the container group at the museum's gift shop is a birdfeeder. Sales are 18 units per week, and the supplier charges $60 per unit. The cost of placing an order with the supplier is $45. Annual holding cost for each unit is 25 percent of a feeder's value, and the museum operates 52 weeks per year. Management currently chose to order 390 units when they place an order. What is the annual cost of the current ordering policy? How much can the shop save in terms of the annual cost if they order optimally? Assume that there is no lead time and no uncertainty in the sales volume.

Explanation / Answer

Annual demand= 18 unites per week= 18*52= 936 units

Holding cost= 25% of 60 per unit= $15

So the total annual cost for the current inventory policy is:-

Total cost= Q/2 (H) + D/Q (S)

= 390/2 ($15) + 936/390 ($45)= $3.033

The total annual cycle inventory cost for the optimal lot size is:-

Total cost—468/2 ($15)+936/468($45)= $3.600

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