In a small distribution firm, the controller was advocating a min-max system with specific rules for computing the minimum and maximum levels of each item. Suppose that for each item the values of A, v, D, L, and r could be reasonably accurately ascertained.

a. Indicate how you would estimate the approximate cost savings of selecting the order quantity of an item through EOQ considerations rather than by the controller’s method.
(Hint: Assume that the order quantity is approximately equal to the difference between the maximum and minimum levels.)

b. Illustrate for the following item: A = $3.20; v = $10; D = 900 units/year; L = 10 weeks; and r = 0.24 $/$/year.