Practise Session

In this section you will be given a small problem to solve. For you to solve this problem a calculator will be needed. If you have a question during the practice session use the questions a the end of each step to find a answer to your question.
You are a manager at a small retail store and must decide on the quantity of baseballs to reorder. The next month is April and you have forecasted that the store can sell 500 baseballs this year. A order consists of 50 baseballs. The cost per baseball is $2.75. To place an order costs the store ten dollars. The store has been told to lower its cost of inventory to raise profits. To accomplish this goal to reduce costs you have decided to determine the economic order quantity for baseballs using the basic model.
Stocking costs
The first step is find out waht are the current stocking costs for baseballs. To find the total stocking cost use the formula TSC=(Q/2)C + (D/Q)S.

What do the letters in the formula stand for?
What does total stocking cost mean?
Where do the numbers used in the formula come from?

Finding EOQ

The second step is to find the Economic Order Quantity(EOQ). The EOQ may be found using the formula EOQ=the square root of (2*D*S)/C.

What is the importance of EOQ?
What makes EOQ work?
Will this model work for all situations?

The third step is to determine the total stocking cost using the EOQ level. The formula used is TSC=(Q/2)C + (D/Q)S. Use the EOQ level in place of Q.

Didn't I do this before?
What do the letters represent again?
What will the answer to this formula give me?

EOQ vs Stock costs

Now that we have determined the total stocking costs for the original and EOQ levels it is time to see which is better. The final step is to simply subtract the EOQ stock cost from the original stock cost. You should now be able to determine which level is better by looking at the difference.

What if ther is no saving?
What if costs are even producing a result of zero?
If I received a discount what effect would it have on EOQ stock costs?

Now that you have completed the practice session let us review. To determine stocking costs for a order of 50 we use the formula (50/2)*2.75 + (500/50)*10. This formula results in a stocking cost of $168.75.
To find the EOQ leve we use the formula Square root of (2*500*10)/2.75. The answer to this formula is 60.30 The stocking cost for this number is found using the same formula as before. Placing the numbers into the formula it looks like this: (60.30/2)*2.75 + (500/60.30)*10. The stocking cost for the EOQ level is $165.83.
For a simple analysis we subtract the EOQ stock cost from the original Stock cost 168.75 - 165.83 = 2.92. By using the EOQ level of ordering 60.30 baseballs the store can save $2.92 in total stocking costs.