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Hermes produced a limited-edition handbag that requires 0.002 yards of faux leather per bag. The entity sold 100 million units of the bag for 2020.
Hermes produced a limited-edition handbag that requires 0.002 yards of faux leather per bag. The entity sold 100 million units of the bag for 2020. The product is sold for $250 which includes a 25% mark-up by management. The cost of planning and placing an order is $8.10 per hour which usually takes 5 hours. The annual holding cost is 10% of unit cost of the leather and the purchase price pr yard of leather is $120. Currently, the entity orders forty (40) times per year. However, management was advised that if the current lot size was doubled, the entity would receive a discount of 2 %%. 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. (3 marks) (4 marks) (c) Calculate the total cost for the alternative order policy (including the current lot size). (16 marks) (d) Indicate to management the optimal order quantity. (1 mark) (e) Give three reasons why it is important that management do not overstock. (3 marks) (f) Define the terms reorder level, inventory and buffer stock
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