Effect of different order quantities on ordering costs and carrying costs, EOQ. Koala Blue, a retailer of bed and bath linen, sells 234,000 packages of Mona Lisa designer sheets each year Koala Blue incurs an ordering cost of $81 per purchase order placed with Mona Lisa Enterprises and an annual carrying cost of $11.70 per package. Liv Carrol, purchasing manager at Koala Blue, seeks your help: She wants to understand how ordering and carrying costs vary with order quantity.

1. Complete the preceding table for Liv Carrol. What is the EGG? Comment on your results.

2. Mona Lisa is about to introduce a Web-based ordering system for its customers. Liv Carrol estimates that Koala Blue’s ordering costs will be reduced to $49 per purchase order. Calculate the new EGG and the new annual relevant costs of ordering and carrying inventory,

3. Liv Carrol estimates that Koala Blue will incur a cost of $2,000 to train its two purchasing assistants to use the now Mona Lisa system. Help Liv Carrol present a case to upper management showing that Koala Blue will be able to recoup its training costs within the first year of adoption.

Scenario 3 4 5 234,000 234,000 234,000 234,000 Annual demand (packages) 234,000 $ 81 $ 81 $ 81 $ 81 $81 Cost per purchase order $ 11.70 $ 11.70 $ 11.70 $ 11.70 $ 11.70 Carrying cost per package per year 2,100 Quantity (packages) per purchase order 900 1,500 1,800 2,700 Number of purchase orders per year Annual relevant ordering costs Annual relevant carrying costs Annual total relevant costs of ordering and carrying inventory