The Cost of Prediction Error for Economic Order Quantity: Syracuse Company used the following formulas to determine the optimal order quantity and the total inventory policy cost:

After adopting the policy of ordering 3,162 units per order and using the policy for a year, they found out that actual storage cost was $3.00 per unit instead of $3.75.

Required:

a. What is the cost of prediction error?

b. Suppose that Syracuse Company found that its storage costs were such that 30 percent of any goods ordered in excess of 2,200 units would be spoiled and cost the company $7 per spoiled unit. This would be added to the company's storage cost of $3.75 per unit. What is the new optimal order quantity, and what is the cost of prediction error from ordering 3,162 units?

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where Q = 2AP VS TC = OS + AP 2 Q = Quantity ordered at one time. S = Cost to store one unit in inventory for a year. A P = Annual usage. Cost to place an order. Their predictions were: A125,000 units P = $150 S = $3.75