Effect of different order quantities on ordering costs and carrying costs, EOQ. Koala Blue retails a broad line of Australian merchandise at its London store. It sells 26,000 Ken Done linen bedroom packages (two sheets and two pillowcases) each year. Koala Blue pays Ken Done Merchandise, Inc., $124.80 per package. Its ordering costs per purchase order are

$86.40. The carrying costs per package are $12.48 per year.

Liv Carrol, manager of the London store, seeks your advice on how ordering costs and carrying costs vary with different order quantities. Ken Done Merchandise, Inc., guarantees the $124.80 purchase cost per package for the 26,000 units budgeted to be purchased in the coming year.

Required 1. Compute the annual ordering costs, the annual carrying costs, and their sum for purchase order quantities of 300, 500, 600, 700, and 900, using the formulas described in this chapter.

What is the economic order quantity? Comment on your results.

2. Assume that Ken Done Merchandise, Inc., introduces a computerized ordering network for its customers. Liv Carrol estimates that Koala Blue’s ordering costs will be reduced to

$48 per purchase order. How will this reduction in ordering costs affect the EOQ for Koala Blue on its linen bedroom packages?