Problem 18-1: Cindy Stewart and Misty Whitworth graduated from business school t
ID: 3121000 • Letter: P
Question
Problem 18-1:
Cindy Stewart and Misty Whitworth graduated from business school together. They now are inventory managers for competing wholesale distributors, making use of the scientific inventory management techniques they learned in school. Both of them are purchasing 85-horsepower speedboat engines for their inventories from the same manufacturer. Cindy has found that the setup cost for initiating each order is $200 and the unit holding cost is $400.
Cindy has learned that Misty is ordering 10 engines each time. Cindy assumes that Misty is using the basic EOQ model and has the same setup cost and unit holding cost as Cindy. Show how Cindy can use this information to deduce what the annual demand rate must be for Misty's company for these engines.
Explanation / Answer
Since Cindy knows that Mindy learned only the EOQ model during her MBA, Cindy safely assumes that Mindy uses the EOQ formula which yields
R = Q^2*h /(2K )= 10^2 400/( 2 200) = 100/year.
Competitors can use each other’s demand information while formulating sales strategies such as price discounts, sales campaigns. It also helps a retailer, while negotiating with a supplier, to know whether that retailer is selling significantly more than the others. The retailers which sell significantly more are given “preferred retailer” status. These retailers can buy items at a lower cost from the supplier because the volume of the sales that they generate makes them strong while negotiating prices with the supplier.