Fact Set for Palmer Pens, problems 6-8

Assume that Palmer Executive Pens uses 1,250,000 gallons of ink each year. Further, assume that Palmer can order the ink at a cost of $2 per gallon plus fixed ordering costs of $100 per order. The firms carrying cost is 20 percent of the inventory value, at cost.

6. Refer to Palmer Pens. What is the firms EOQ?

7. Refer to Palmer Pens. What is Palmer's minimum total inventory cost per year?

8. Refer to Palmer Pens. Now, suppose the manufacturer offers a discount of 0.5 percent for orders of a least 40,000 gallons. Should Palmer increase its ordering quantity to take the discount?

a. Yes; it will save $1,125 if it takes the discount.

b. No; it will lose $1,125 if it takes the discount. c. Yes; it will save $11,375 if it takes the discount.

d. No; it will lose $11,415 if it takes the discount.

e. Yes; it will save $11,415 if it takes the discount.