This is the formula that you will need to calculate the EOQ. The other answers in the case are pretty straight forward. Just read the case and answer the questions in a working document style in an excel file and your analysis in word.f

You have been hired by Big10Sweaters.com and need to make a good impression by making good supply chain decisions.

Steve majored in accounting and likes to pump the numbers. He has done a great job of keeping the books and selling the company to some small venture capital people in the area. Last year, he was successful in getting them to invest $1,500,000 in the company (a onetime investment). There were some significant strings attached to this investment in that it stipulated that only $120,000 per year could go toward paying the salary of the two principals. The rest had to be spent on the website, advertising, and inventory. In addition, the venture capital company gets 20 percent of the company profits, before taxes, during the first four years of operation, assuming the company makes a profit. The business is cyclic, and sales are concentrated during the period leading up to the college football season, which runs between late August and the end of each year. For the upcoming season, the firm wants to sell sweaters to only a few of the largest schools in the Midwest region of the United States. In particular, they are targeting The Ohio State University (OSU), the University of Michigan (UM), Michigan State University (MSU), Pado University (PU), and Indiana University (IU). These five schools have major football programs and a loyal fan base.The prices are great, but service is a problem since the supplier has a 20-week lead time for each order and the minimum order size is 5,000 sweaters. The order can consist of a mix of the different logos, such as 2,000 for OSU, 1,500 for UM, 750 for MSU, 500 for PU, and 250 for IU. Within each logo sub lot, sizes are allocated based on percentages and the supplier suggests 15 percent X-large, 60 percent large, 15 percent medium, and 10 percent small based on their historical data. This is the company's second year of operation. Last year they only sold sweaters for three of the schools, OSU, MU, and PU. They ordered the minimum 5,000 sweaters and sold all of them, but the experience was painful since they had too many MU sweaters and not enough for OSU fans. Last year they ordered 2,300 OSU, 1,800 MU, and 900 PU sweaters. Of the 5,000 sweaters, 310 had to be sold at a steep discount on eBay ($65.00/sweater) after the season. They were hoping not to do this again.

For the next year, you have collected some data relevant to the decision. Below shows cost information for the product when purchased from the supplier in China. Here we see that the cost for each sweater, delivered to the warehouse of our monogramming subcontractor, is $60.88. This price is valid for any quantity that we order above 5,000 sweaters. This order can be a mix of sweaters for each of the five schools we are targeting. The supplier needs 20 weeks to process the order, so the order needs to be placed around April 1 for the upcoming football season. These have been in negotiation the past few weeks and may change. They are not willing to bend on the fixed cost per order of $42. This is not per unit, typically cost of ordering and shipping and handling from China Supplier to Domestic subcontractor.

	Cost Information for the Big Ten Sweaters
China Supplier Cost
Materials		$ 32.00
Labor		10.50
Overhead		1.25
Transportation within China		1.00
Supplier Profit		8.95
Agent's Fee		2.68
Freight (Ocean Carrier)		1.50
Duty, Insurance, etc.		3.00
Total Supplier Cost			$60.88
Domestic Subcontractor Cost
Monogram Material		$ 5.00
Labor		8.00
Total Subcontractor Cost			$13.00
Total Cost (per sweater)			$73.88

Our monogramming subcontractor gets $13 for each sweater. They also charge a 3% holding cost based on the $73.88 per sweater cost. Shipping cost is paid by the customer when the order is placed.

In addition to the cost data, you also have some demand information, as shown below. The exact sales numbers for last year are given. The exhibit indicates the retail ($125/sweater) or full price sales for the sweaters. Sweaters that we had at the end of the season were sold through eBay for $65 each and were not monogrammed. Keep in mind that the retail sales numbers do not accurately reflect actual demand since they stocked out of the OSU sweaters toward the end of the season.

Forecast Data for the Big Ten Sweaters

School Name	AVG Game Attendance	EBAY Sales Last Yr	Last Yrs Actual Sales	This Yrs Average Forecast
OSU	105,261	102	2,398	2600
Michigan	108,933	177	1,323	1867
Podue	50,457	31	969	1100
Michigan State	74,741			1717
Indiana	41,833			617
Penn State	107,008
Wisconsin	80,109
Iowa	70,214
Illinois	59,545
Minnesota	50,805
Northwestern	24,190
Nebraska	85,071
Rutgers	31,478
Maryland	75,327
Total		310	4690	7901

As for advertising the sweaters for next season, Rhonda is committed to using the same approach used last year. The firm placed ads in the football program sold at each game. These worked very well for reaching those attending the games, but she realized there may be ways to advertise that may open sales to more alumni. She has hired a market research firm to help identify other advertising outlets but has decided to wait at least another year to try something different.

Forecasting demand is a major problem for the company. You have asked Rhonda and Steve to predict what they think sales might be next year. You have also asked the market research firm to apply their forecasting tools. Data on these forecasts are given.

Based on advice from the market research firm, you have decided to use the average demand forecast to determine your orders.

You will allocate your order to the individual schools based on their expected percentage of total demand. You discussed your analysis with Rhonda and Steve and they are OK with your analysis. They would like to see what the order quantities would be if each school was considered individually. You were also able to work with your suppliers and worked towards increasing a positive relationship, they have lowered your order minimum to 500 sweaters. They have also reduced their lead time to 8 weeks.

Set up a spreadsheet with all the data from above and you are ready to do some calculations.

Questions

1. You are curious as to how much Rhonda and Steve made in their business last year. You do not have all the data, but you know that most of their expenses relate to buying the sweaters and having them monogrammed. You know they paid themselves $45,000 each and you know the rent, utilities, insurance, and a benefit package for the business was about $27,000. About how much do you think they made before taxes last year? If they must make their payment to the venture capital firm, and then pay 47% in taxes, what was their increase in cash last year?

2. How many sweaters should you order this year? Break down your order by individual school and size. Document your calculations in your spreadsheet.

3. What is the Economic Order Quantity (sweaters/order) and how many orders should be placed for the upcoming season

4. What do you think the company could make this year? They are paying you $45,000 and you expect your benefit package addition would be about $1,000 per year. The two owners are going to pay themselves an addition $5,000 in their salaries. Assume that they order based on the average forecast. (Figure out total costs, revenue and profit) Dont forget about the investors, taxes, reorder cost, etc.

5. How should the business be developed in the future? Be specific and consider changes related to your supplier, the monogramming subcontractor, target customers, and products.