A large retailer (in Sydney) that sells products manufactured by Nanuq Australia needs to develop an inventory policy for electric heaters. The annual demand for the electric heaters is 3,000 (A) units. Each unit costs the retailer $50 (c) with holding costs amounting to 9 cents in the dollar per year (h = 0.09). The order cost is estimated to be $30 (k).
(a) Assuming that the retailer does not wish there to be any shortage, determine the economic order quantity for the electric heaters.
(b) Calculate the total annual relevant cost.
(c) What is the time between orders (expressed as a fraction of a year)?
(d) Now assume that the retailer is willing to take backorders for 20% of all purchases. Determine a new economic order quantity for the electric heaters.]

Problem 2
The Top Rider Company is a small manufacturing company that uses gear assemblies to produce four different models of mountain bikes. One of these gear assemblies, the "Smooth Shifter", is used for the two most expensive of Top Rider's four models, and has an estimated annual demand of 300 units. Top Rider's estimate of the cost to place an order is $40, and the holding cost for each assembly is $60 per year. The company operates 250 days per year.
(a) Determine the Economic Order Quantity
(b) What is the annual inventory holding cost if Top Rider orders using the EOQ quantity?
(c) What is the annual ordering cost if Top Rider orders using the EOQ quantity?
(d) What is the total relevant annual cost if Top Rider orders using the EOQ quantity?
(e) What is the cycle length (time between orders) when orders are placed using the EOQ quantity?
(f) How many times per year must Top Rider order the Smooth Shifter when orders are placed using the EOQ quantity?
(g) The purchasing manager decides that, in order to save purchasing time, orders for the Smooth Shifter will be placed once a month, or twelve times per year. How much extra does this approach cost Top Rider in total relevant annual costs (instead of Top Rider ordering using the EOQ quantity)?