Question

Speedy Wheels is a wholesale distributor of bicycles for the western United States. Its Inventory Manager, Ricky Sapolo, is currently reviewing the inventory policy for one popular model — a small, one-speed girl's bicycle that is selling at the rate of 250 per month. The administrative cost for placing an order for this model from the manufacturer is $200 and the purchase price is $70 per bicycle. The annual cost of the capital tied up in inventory is 20 percent of the value of these bicycles. The additional cost of storing the bicycles — including leasing warehouse space, insurance, taxes, and so on — is $6 per bicycle per year.

EOQ = 245 units

Total Variable Cost = $4898.98



Speedy Wheel's customers (retail outlets) generally do not object to short delays in having their orders filled. Therefore, management has agreed to a new policy of having small planned shortages occasionally to reduce the variable inventory cost. After consultations with management, Ricky estimates that the unit shortage cost (including lost future business) would be $30.

Use the EOQ model with planned shortages to determine the new optimal inventory policy.

What is the quantity that will now be ordered?

Answer 1

The student is attempting to calculate a new optimal order quantity using the EOQ model with planned shortages for a bicycle distributor. Additional data is required to solve for the new quantity, which involves balancing holding, ordering, and shortage costs to minimize total costs.

Step-by-step explanation:

The question concerns the determination of an optimal inventory policy using the Economic Order Quantity (EOQ) model with planned shortages. Speedy Wheels seeks to calculate the new quantity that needs to be ordered for a popular model of a girl's bicycle, factoring in shortage costs. To solve for the new optimal order quantity, one would typically use a modified EOQ formula that incorporates both holding and shortage costs. This requires additional data that is not provided in the question. However, the key information necessary would include the demand rate, holding cost, setup cost, and the cost of a shortage per unit. These values would be used to find a balance point where the total costs are minimized.