Question

Rudy's Sportswear sells a pair of Nike sneakers for $40. Due to the recent fitness craze, these shoes are in high demand: 50 pairs of shoes are sold per week. The ordering cost is $20/ order, and the annual holding cost is 20 percent of selling price. If the store operates 52 weeks a year, what can you say about the current lot size of 235?

A. cannot tell from the information given
B. just right
C. too small
D. too large

Answer 1

The current lot size of 235 is too large.

Step-by-step explanation:

To determine if the current lot size of 235 is appropriate, we need to compare the ordering cost to the holding cost. The ordering cost per order is $20, and since 50 pairs of shoes are sold per week, we can calculate the annual ordering cost as follows:

Annual ordering cost = Ordering cost per order x Number of orders per year = $20 x (Total pairs sold per year / Pairs sold per order) = $20 x (50 x 52 / 235) = $20 x 11.064 = $221.28

The annual holding cost is 20% of the selling price, which is 20% of $40 = $8. Therefore, the annual holding cost for 235 pairs of shoes is $8 x 235 = $1880.

Comparing the annual ordering cost ($221.28) and the annual holding cost ($1880), we can see that the holding cost is significantly larger than the ordering cost. This suggests that the current lot size of 235 is too large.