Dolce & Gabanna manufactures a special product, which requires 0.001 grams of copper per unit. The entity sells 50 million units of this item annually. The product is sold for $125 which includes a 20% mark-up by management. The cost of planning and placing an order is $7.50 per hour which usually takes 5 hours. The annual holding cost is 10% of unit cost of the special product and the purchase price for one gram of copper is $60. Currently, the entity orders twenty times per year. However, management was advised that if the current lot size was doubled, the entity would receive a discount of 2 ½%. If the current lot size was four times more a discount of 5% would be granted, meanwhile a 10% discount would be offered for increasing the current lot size by five times.

Required:

(a) Calculate the economic order quantity (EOQ).

(b) Calculate the total cost of the raw material at EOQ.

(c) Calculate the total cost for the alternative order policy (including the current lot size).

(d) Indicate to management the optimal order quantity.

(e) Give three reasons why it is important that management do not overstock.

(f) Define the terms reorder level, inventory and buffer stock.