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Question: Suppose that your firm manufactures toy flying drones. Monthly demand for the drones is 46,000 units. Setup cost per order is $160, and the annual holding cost percentage is 22%. The drones cost $40 to produce and are sold for $89.

A. If you have one warehouse, what is the economic order quantity for the drones? What is the total of the annual setup and holding costs of this quantity?

B. Suppose that you have 81 warehouses instead of one, and total demand is equally distributed among the warehouses. If setup and holding costs are the same in the smaller warehouses as they would be for the single large warehouse, what is the EOQ for the dolls at each of the 81 warehouses? What is the total of the annual setup and holding costs at each warehouse? What is the total of the company's annual setup and holding costs?

C. Using centralized warehousing as in part a means that products must be shipped over longer distances. Suppose that shipping costs $1.20 per unit when using one warehouse and $0.90 per unit when using 81 warehouses. Which option should the company choose? Support your answer.

D. (2 points) Based on your answers to a and b above, if total company demand is D, what is the general formula for the total company EOQ cost of using N warehouses instead of one (if the demand is spread evenly over those warehouses)?

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M92667077

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