The EOQ Annondale Manufacturing starts each period with 10,000 “Long John” golf clubs in stock. This stock is depleted each month and reordered. If the carrying cost per golf club is $1, and the fixed order cost is $5, is Annondale following aneconomically advisable strategy?

Question

The EOQ Annondale Manufacturing starts each period with 10,000 “Long John” golf clubs in stock. This stock is depleted each month and reordered. If the carrying cost per golf club is $1, and the fixed order cost is $5, is Annondale following aneconomically advisable strategy?

Accepted Answer

We can answer by first calculating Annondale’s carrying and restocking costs. The average inventory is 5,000 clubs, and, because the carrying costs are $1 per club, total carrying costs are $5,000. Annondale restocks every month at a fixed order cost of $5, so the total restocking costs are $60. What we see is that carrying costs are large relative to reorder costs, so Annondale is carrying too much inventory.

To determine the optimal inventory policy, we can use the EOQ model. Because Annondale orders 10,000 golf clubs 12 times per year, total needs (T) are 120,000 golf clubs. The fixed order cost is $5, and the carrying cost per unit (CC) is $1. The EOQ is therefore:

[latex] EOQ=\sqrt{\frac{2T imes F}{CC} } [/latex]

[latex]=\sqrt{\frac{(2 imes 120,000) imes \$5 }{1} } [/latex]

[latex]=\sqrt{1,200,000} [/latex]

[latex]=1,095.45 units [/latex]

We can check this by noting that the average inventory is about 550 clubs, so the carrying cost is $550. Annondale will have to reorder 120,000 / 1,095.45 = 109.54 ≈ 110 times. The fixed order cost is $5, so the total restocking cost is also about $550.

Question 20.S-TP.3: The EOQ Annondale Manufacturing starts each period with 10,0...

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