EOQ and changing prices Gobrach operates a small mail order business. He has ar- ranged to have credit card companies include advertisements and order forms for his products with their monthly bills to customers. One of his more popular items is an electronic clock/radio/calendar that sells for $89.95. Demand for the product has been 15,000 units per year. The cost per unit is $64, ordering cost is $80 per order, and inventory carrying cost is 15 percent of cost.

The supplier of the product has announced a price decrease to $60 per unit for next year for orders in lots of 500 units. The price per unit on broken lots is $66. However, ordering cost is expected to increase by $10 per order next year due to increases in postage, phone, and other expenses. Patrick estimates that if he reduces his selling price to $85.95, demand should increase by 20 percent. Any smaller decrease in price probably would not affect demand appreciably.

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REQUIRED a. Compute the EOQ for the current year. b. Compute total inventory cost at the current EOQ. c. Compute the EOQ for next year. d. Compute the inventory cost at next year's EOQ. e. Determine the additional cost of ordering in lots of 500 units or in broken lots. f. Discuss the strategy that Patrick should adopt for making inventory decisions.