20-16 Economic order quantity for retailer. Fan...

20-16 Economic order quantity for retailer. Fan...

Author: Dannie Young

20-16 Economic order quantity for retailer. Fan Base (FB) operates a megastore featuring sports merchandise. It uses an EOQ


20-16 Economic order quantity for retailer. Fan Base (FB) operates a megastore featuring sports merchandise. It uses an EOQ decision model to make inventory decisions. It is now considering inventory decisions for its Los Angeles Galaxy soccer jerseys product line. This is a highly popular item. Data for 2013 are as follows:
Expected annual demand for Galaxy jerseys


Ordering cost per purchase order


Carrying cost per year

      $7 per jersey

Each jersey costs FB $40 and sells for $80. The $7 carrying cost per jersey per year consists of the required return on investment of $4.80 (12% × $40 purchase price) plus $2.20 in relevant insurance, handling, and storage costs. The purchasing lead time is 7 days. FB is open 365 days a year.
1.Calculate the EOQ.
2.Calculate the number of orders that will be placed each year.
3.Calculate the reorder point.
22-35 Transfer pricing, goal congruence. The Croydon Division of CC Industries supplies the Hauser Division with 100,000 units per month of an infrared LED that Hauser uses in a remote control device it sells. The transfer price of the LED is $8, which is the market price. However, Croydon does not operate at or near capacity. The variable cost to Croydon of the LED is $4.80, while Hauser incurs variable costs (excluding the transfer price) of $12 for each remote control. Hauser’s selling price is $32.
Hauser’s manager is considering a promotional campaign. The market research department of Hauser has developed the following estimates of additional monthly volume associated with additional monthly promotional expenses.
Additional Monthly Promotional Expenses:




Additional Monthly Volume (Units)




1.What level of additional promotional expenses would the Hauser division manager choose?
2.As the manager of the Croydon division, what level of additional promotional expenses would you like to see the Hauser division manager select?
3.As the president of CC Industries, what level of spending would you like the Hauser division manager to select?
4.What is the maximum transfer price that would induce the Hauser division to spend the optimal additional promotional expense from the standpoint of the firm as a whole?

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