Reference no: EM131739676

Speedy Wheels is a wholesale distributor of bicycles. Its Inventory Manager, Ricky Sapolo, is currently reviewing the in- ventory policy for one popular model that is selling at the rate of 500 per month. The administrative cost for placing an order for this model from the manufacturer is $1,000 and the purchase price is $400 per bicycle. The annual cost of the capital tied up in inven- tory is 15 percent of the value (based on purchase price) of these bicycles. The additional cost of storing the bicycles—including leas- ing warehouse space, insurance, taxes, and so on—is $40 per bicycle per year. (a) UsethebasicEOQmodeltodeterminetheoptimalorderquan- tity and the total variable inventory cost per year. (b) Speedy Wheel’s customers (retail outlets) generally do not ob- ject to short delays in having their orders filled. Therefore, man- agement has agreed to a new policy of having small planned shortages occasionally to reduce the variable inventory cost. Af- ter consultations with management, Ricky estimates that the an- nual shortage cost (including lost future business) would be $150 times the average number of bicycles short throughout the year. Use the EOQ model with planned shortages to determine the new optimal inventory policy.