Question

Tim Madsen is the purchasing agent for Computer Center, a large discount computer store. He has recently added the hottest new computer, the Power model, to the store's stock of goods. Sales of this model now are running at about 52 per month. Tim purchases these computers directly from the manufacturer at a unit cost of $3,000, where each shipment takes half a week to arrive.

Tim routinely uses the basic EOQ model to determine the store's inventory policy for each of its more important products. For this purpose, he estimates that the annual cost of holding items in inventory is 20% of their purchase cost. He also estimates that the administrative cost associated with placing each order is $75. Because of the popularity of the Power model computer, Tim Madsen has found that customers are willing to purchase a computer even when none are currently in stock as long as they can be assured that their order will be filled in a reasonable period of time. Therefore, Tim has decided to switch from the basic EOQ model to the EOQ model with planned shortages, using a unit shortage cost of $200.
Use the MS Excel Solver for the EOQ model with planned shortages to find the new optimal inventory policy and its total variable inventory cost per year (TVC).

Answer 1

To find the new optimal inventory policy and the total variable inventory cost per year (TVC), Tim Madsen can use the EOQ model with planned shortages. Solver can calculate the optimal order quantity, the number of orders per year, and the TVC.

Step-by-step explanation:

To find the new optimal inventory policy and the total variable inventory cost per year (TVC), Tim Madsen can use the EOQ model with planned shortages. In this model, the unit shortage cost is $200. By using Microsoft Excel Solver, Tim can input the relevant data, such as the unit cost of $3,000, the annual cost of holding items in inventory estimated at 20% of purchase cost, and the administrative cost of placing each order being $75. Solver can then calculate the optimal order quantity, the number of orders to be placed per year, and the total variable inventory cost per year.