Estimate Costs for Optimal Order Policy:

Mariposa Recreational Products Company produces roller skates for street use. The company has been so involved responding to the increased demand (now at 200,000 units per year) for its product that an adequate cost control system has not been installed. Recently, however, management has been directing its attention to this problem. A question has arisen concerning the EOQ for the sets of unassembled skate parts that are the company's direct materials.

The set of parts comes from one supplier and costs $16 per set. There is a charge of $1 per set for shipping from the manufacturer. When the parts arrive, they must be checked to make certain that each set is complete and that defective units are identified and returned to the manufacturer. The checking requires one fourth hour per unit, and the labor rate for this activity is $6 per hour including variable fringe benefits. The same class of labor is required to check the inventory once a year as a part of the company's inventory management system. The checking requires an average of one-eighth hour per unit in inventory.

There is an inventory tax of $.62 per set of parts in inventory on February 28 each year. Insurance on the inventory amounts to $1.50 per unit. When placing an order, the company incurs out-of-pocket costs of $40 for bookkeeping and arranging trans- portation for the parts. When the shipment arrives, a supervisor must review the documentation and determine the number of units in the shipment. This activity requires an incremental $35.00 of supervisory-related costs. A dockworker is also present to assist in unload- ing the shipment. This dockworker spends about 13 hours in this activity and is paid at the $6 labor rate. The parts manufacturer will only accept orders in lots of even hundreds.

The company estimates its cost of capital is 16 percent.

Required: Determine the EOQ for sets of skate parts.