Question 3: EOQ Model (20 points)

The academic publisher BA305 Inc. markets a bestselling Operations Management text. BA305 has a fixed cost of $90 for each copy of the text and it sells them for $150 each. The monthly demand for the text is 1000 copies. The ordering cost is $25/order; and the annual inventory holding cost is 5 % of fixed cost. The delivery time for supply is exactly 18 days (assume 1 year = 360 days).

a. (4 points) What is the optimal order quantity to minimize inventory costs? Answer to the nearest integer. What is the total annual cost including holding, ordering, and purchase costs?

b. (5 points) What is the reorder point of the OM text? How many orders should BA305 place per year?

c. (5 points) Management at BA305 has been informed that due to a decrease in the annual holding cost, the EOQ has been increased by 20%. Find the new fixed cost for each copy of the text that has led to this decision (accepting that order cost and annual demand are not changed).

d. (6 points) Focus initial problem and ignore the statement in part (c). BA305 can obtain a 2% discount if it agrees to place 12 orders a year to fill its annual demand. Should it accept the discount?