Major League Lumber (MLL) sells baseball bats. Its most popular models are the W

Question

Major League Lumber (MLL) sells baseball bats. Its most popular models are the Williams and the Mendoza. The sales rates of the two models are the same. Although they come from different suppliers, the models have similar ordering costs. The Mendoza, however, costs MLL twice as much as the Williams. MLL’s current policy is to order 200 Mendoza bats when it places an order and to order 400 Williams bats when it places an order. Is MLL ordering optimally (i.e., ordering to minimize its annual holding and ordering costs) for both models?

Check one: ___ Yes! ___ No!

Explain why

Explanation / Answer

No.

The optimal ordering quantity is popularly measure by EOQ (economic order quantity). This value for any inventory is represented by

EOQ = sqrt (2DS/H)

Where D is the demand, S is the setup cost (ordering cost), H is the holding cost for inventory.

Now let’s consider the problem in hand. The demand is the same (since sale is the same), the holding cost of inventory is likely to be the same as both are baseball bats. The only variable left in the equation for the EOQ is the S or the setup (ordering) cost.

Now we can see that there is an exponentially proportional relationship between EOQ and S.

Considering D and H are the same for two different products, we can see that

EOQ2 = S

What this means in very basic term is that for every X unit increase in ordering cost, the EOQ is increased by the square of X.

Since Mendoza costs 2 times that of Williams, the ordering quantity of Mendoza must be higher than Williams in order to have an optimal order quantity. Since the ordering quantity is the same for both of them, we can safely say that MLL is not ordering optimally.

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