Question

An appliance store carries a specialty model of microwave ovens. The demand for the microwave oven is relatively constant at 2500 units per year. Placing an order costs the store $500 regardless the quantity ordered. Carrying one unit over a one-year period costs the store $50. The store opens 300 days per year and the lead time for this item is 12 working days. Because of the special features of the microwave oven, customers may buy it whether it is currently available in the store. Hence, the store is considering selling it on a back order basis if it is beneficial. It is estimated that one unit on back order for a one-year period costs the store $150.

Assuming the inventory policy of the appliance store does not allow stock out, determine the economic order quantity
A) 50
B) 150
C) 224
D) 500
E) None of the above

Answer 1

After applying the economic order quantity (EOQ) formula to the given data, the EOQ for the microwave ovens is not listed in the provided options, making 'None of the above' the correct answer for the appliance store's scenario.

Step-by-step explanation:

To determine the economic order quantity (EOQ) for the microwave ovens at the appliance store, we will apply the EOQ formula which is given by:

EOQ = √((2DS)/H)

Where D is the annual demand, S is the order cost, and H is the carrying cost per unit per year.

In this case, D = 2500 units, S = $500, H = $50. Plugging these values into the EOQ formula, we get:

EOQ = √((2 * 2500 * 500)/50) = √(500000/50)
= √10000 = 100 units.

Since this number is not one of the options provided and considering EOQ should be the closest to the lowest total cost, the correct EOQ is likely non-listed, hence 'None of the above' is the correct choice.

It should be noted that backorder costs have not been included in this calculation as the EOQ formula assumes no stockouts. Additionally, the information provided in the question regarding economies of scale for toaster ovens is not relevant to the EOQ calculation for the microwave ovens.