Now Ray asks you to look at the companys inventory position. He thinks that inventories might be

Question:

Now Ray asks you to look at the company’s inventory position. He thinks that inventories might be too high as a result of the manager’s tendency to order in large quantities. Ray has decided to examine the situation for one key product—fly rods that cost $320 each to purchase and prepare for sale. Annual sales of the product are 2,500 units (rods), and the annual carrying cost is 10 percent of inventory value. The company has been buying 500 rods per order and placing another order when the stock on hand falls to 100 rods. Each time SSP orders, it incurs a cost equal to $64. Sales are uniform throughout the year.
a. Ray believes that the EOQ model should be used to help determine the optimal inventory situation for this product. What is the EOQ formula and what are the key assumptions underlying this model?
b. What is the formula for calculating total inventory costs?
c. What is the EOQ for the fly rods? What will the total inventory costs be for this product if SSP orders the EOQ amount?
d. What is SSP’s added cost if it orders 500 fly rods rather than the EOQ amount? What if it orders 250 rods each time?
e. Suppose it takes three days for SSP to receive its orders and package the rods before they are ready for sale. Assuming certainty in production time and usage, at what inventory level should SSP order more fly rods? (Assume a 360-day year that SSP is open every day, and that SSP orders the EOQ amount.)
f. Of course, there is uncertainty in SSP’s usage rate as well as in order delays, so the company must carry a safety stock to avoid running out of the fly rods and facing a loss sales. If SSP carries a safety stock of 50 rods, what effect would this policy have on total inventory costs?
g. For most of SSP’s products, inventory usage is not uniform throughout the year but rather follows some seasonal pattern. Could the EOQ model be used in this situation? If so, how?
h. How would the following factors affect the use of the EOQ model?
(1) Use of “just-in-time” procedures.
(2) The use of air freight for deliveries.
(3) Computerized inventory control systems.