Ronald van Hooijdonk is the owner of a truck repair shop. He uses an EOQ model for each of his truck parts. He initially predicts the annual demand for heavy-duty tyres to be 2000. Each tyre has a purchase price of €50. The incremental ordering costs per purchase order are €40. The incremental carrying costs per year are €4 per unit plus 10% of the supplier’s purchase price. 

Required 

1. Calculate the EOQ for heavy-duty tyres, along with the sum of annual relevant ordering costs and carrying costs. 

2. Suppose van Hooijdonk is correct in all his predictions except the purchase price. (He ignored a new law that abolished tariff duties on imported heavy-duty tyres, which led to lower prices from foreign competitors.) If he had predicted events correctly, he would have foreseen that the purchase price would drop to €30 at the beginning of the year and then remain unchanged throughout the year. What is the cost of the prediction error?