Effect of different order quantities on ordering costs and carrying costs, EOQ.

Rève Andalou retails a broad line of Spanish merchandise at its Mont-St-Michel store. It sells 26 000 Juanita linen bedroom packages (two sheets and two pillow cases) each year. Rève Andalou pays Juanita, SA, €104 per package. Its ordering costs per purchase order are €72. The carrying costs per package are €10.40 per year.

Simone Voirbeau, manager of the Mont-St-Michel store, seeks your advice on how ordering costs and carrying costs vary with different order quantities. Juanita, SA, guarantees the €104 purchase cost per package for the 26 000 units budgeted to be purchased in the coming year.

Required

1. Calculate the annual ordering costs, the annual carrying costs and their sum for purchase-order quantities of 300, 500, 600, 700 and 900, using the formulae described in this chapter. What is the economic order quantity? Comment on your results.

2. Assume that Juanita SA introduces a computerised ordering network for its customers. Simone Voirbeau estimates that Rève Andalou's ordering costs will be reduced to €40 per purchase order. How will this reduction in ordering costs affect the EOQ for Rève Andalou on their linen bedroom packages?