Yellow cells Yellow cells, a South African medium-sized business, sell a single product (wireless headphones) on a wholesale basis. Its annual revenue is R 20m, all of which is on credit. Each set of headphones sells for R 250. Yellow cells buys them in at a cost of R 200 from its supplier. Demand for the product is not expected to change. With regard to inventory management, the company has always ordered 10% of its annual sales demand per order. The current cost per order is R 1,500 and the current holding cost is R 15 per set of headphones per year. An industry expert has been consulted, and she has suggested that the company considers that order sizes might be determined using the economic order quantity (EOQ) model.

Question 1 What is the total annual ordering cost associated with the current ordering policy?

Question 2 What is the economic order quantity (EOQ) in units and the increase (decrease) in cost of this potential new method of ordering?

Question 3 Critically discuss the limitations of the EOQ model as a way of managing inventory.