Demand for the Child Cycle at Best Buy is 500 units per month. Best Buy incurs a fixed order placement, transportation, and receiving cost of Rs. 4,000 each time an order is placed. Each cycle costs Rs. 500, and the retailer has a holding cost of 20 percent. Evaluate the number of units of computers that the store manager should order in each replenishment lot?
Question
Demand for the Child Cycle at Best Buy is 500 units per month. Best Buy incurs a fixed order placement, transportation, and receiving cost of Rs. 4,000 each time an order is placed. Each cycle costs Rs. 500, and the retailer has a holding cost of 20 percent. Evaluate the number of units of computers that the store manager should order in each replenishment lot?
Solution
To solve this problem, we can use the Economic Order Quantity (EOQ) model. The EOQ model minimizes the total holding and ordering costs. It is given by the formula:
EOQ = sqrt((2DS)/H)
where: D = Demand rate per period S = Order cost per order H = Holding cost per unit per period
In this case:
D = 500 units per month S = Rs. 4,000 per order H = 20% of Rs. 500 = Rs. 100 per unit per month
Substituting these values into the formula, we get:
EOQ = sqrt((25004000)/100) = sqrt(40000000) = 2000 units
Therefore, the store manager should order 2000 units of Child Cycle in each replenishment lot.
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