Question

A North Face retail store in Chicago sells 500 jackets each month. Each jacket costs the store $100 and the company has an annual holding cost of 25 percent. The fixed cost of a replenishment order (including transportation cost) is $100. The store currently places a replenishment order for Q.

1. What is the annual holding and ordering cost?

2. On average, how long does a jacket spend in inventory?

3. If the retail store wants to minimize ordering and holding cost, what order size do you recommend?

4. How much would the optimal order reduce holding and ordering cost relative to the current policy?

Answer 1

To calculate the annual holding and ordering cost, use inventory management formulas with the given data points. The optimal order quantity to minimize costs can be determined using the Economic Order Quantity (EOQ) model, and the average time in inventory can be inferred from the inventory levels.

Step-by-step explanation:

The annual holding and ordering cost for a North Face retail store in Chicago can be calculated using inventory management formulas. Given that the store sells 500 jackets each month at a cost of $100 each, and the annual holding cost is 25 percent, we can calculate the holding cost per unit per year as 0.25 × $100 = $25. The ordering cost per replenishment is $100. To find the average time a jacket spends in inventory we use the formula: Average Inventory Level = Q/2, where Q is the order quantity. To minimize the ordering and holding costs, we recommend using the Economic Order Quantity (EOQ) model, which gives the optimal order size that minimizes these costs.