Fashion Shoes Inc. wants to do inventory planning to minimize the costs. Each time they make a purchase from Zodiac, the total costs for processing the purchase order and the transportation costs turn out to be $500. The inventory holding cost is 20% of the purchase price of the sports shoes. If Fashion Shoes buys the Aerospace shoes at a price of $45 per pair from Zodiac, and if the total annual demand is 40,000 pairs, what should be the economic order quantity (EOQ) for ordering Aerospace shoes only? What is the total annual cost of inventory for this model?

Now suppose that the total annual demand turns out to be 50,000. How much extra inventory-related cost does Fashion Shoes pay because of this forecast error?

Finally, the production manager at Fashion Shoes provides a report to the top management saying that the production of Aerospace Model can be made in-house. The total setup costs for each production run will be only $120. Moreover, the cost of producing one pair of Aerospace will only cost $40. The production manager estimates that the production rate will be 400 units per day (total number of production days in a year is 250). However, this adjustment requires an initial investment of $1,000,000. Does it make sense to move the production of Aerospace in-house? Compute the EPQ value (using the real demand figure, 200,000, and total sales days in a year is assumed to be 250), the total inventory holding and setup costs, as well as total product cost of the items and compute the payback period for this investment. What do you think?