Inventory Management 1 (Basic FOQ Model and Special Properties)

Basic FOQ model:

D = annual demand in units

S = setup (procurement) cost per order

L = delivery lead time in days Q = optimal order size (FOQ)

Order size (Q)

d = daily demand in units

H = holding (carrying) cost per unit per year

C = Cost (wholesale price) paid by vendor

R = reorder level (reorder point)

Reorder level (R)

Total cost (TC)

Please be aware that FOQ is also known as EOQ (economic order quantity).

(You must show your calculations / steps in order to receive full credit)

Exercise 1

A computer store's estimated 12-month demand for a certain mouse is 500 units. The cost of this item to the retailer is $10.00 per mouse. Supplier's warehouse is located in the east, but delivery is known for certain to be five days. The cost of placing an order is $20.00. The carrying cost to hold one mouse for a month is 1% of the cost of the mouse. What is the economic order quantity for this mouse? What is the reorder point? Assume that the store opens 365 days in a year.

Exercise 2

The store manager of Payless Shoes has reviewed the policy of placing 30 pairs of working boots in each order. He found this ordering policy resulted in total annual setup cost and carrying costs of $8,395 and $10,737, respectively. Based on the provided accounting data, can you tell whether the company is using the FOQ policy? If not, what actions should be taken by the manager in order to reduce the total costs (i.e., the sum of total setup and carrying costs)?