The 24-Hour Mart operates a chain of supermarkets. Its best-selling soft drink is Fruitslice. Demand (D) in April for Fruitslice at its Regina supermarket is estimated to be 7,200 cases (24 cans in each case). In March, the Regina supermarket estimated the ordering costs per purchase order (P) for Fruitslice to be $36. The carrying costs (C) of each case of Fruitslice in inventory for a month were estimated to be $1.20. At the end of March, the Regina 24-Hour Mart reestimated its carrying costs to be $1.80 per case per month to take into account an increase in warehouse- related costs. During March, 24-Hour Mart restructured its relationship with suppliers. It reduced the number of suppliers from 600 to 180. Long-term contracts were signed only with those suppliers that agreed to make product quality checks before shipping. Each purchase order would be made by linking into the suppliers’ computer network. The Regina 24-Hour Mart estimated that these changes would reduce the ordering costs per purchase order to $6. The 24-Hour Mart is open 30 days in April.
REQUIRED
1. Calculate the economic order quantity in April for Fruitslice. Use the EOQ model, and assume in turn that
a. D = 7,200; P = $36; C = $1.20
b. D = 7,200; P = $36; C = $1.80
c. D = 7,200; P = $6; C = $1.80
2. How does your answer to requirement 1 give insight into the retailer’s movement toward JIT purchasing policies?