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Palu Gear is mountaineering gear retail store operating in Northern Colorado. From its humble beginning of one store, the chain has expanded to 5 stores spread across the area. The most popular items sold by Palu Gear is an in-house designed hightech "Palu jackets". These jackets are sold throughout the entire year and their demand is not materially affected by time of the year. Annual jacket revenues for each store were of similar size and amounted to roughly $1,000,000 per store. The jackets are manufactured by suppliers located in Mexico, and are sold at the price of $325 per unit, which represented a markup of 30% above what Palu paid the supplier. Palu Gear has an annual cost of inventory of 20%
(a) The current supply chain for Palu Jackets operated as follows. Being a profit center, each store made its own inventory decisions, and each store is supplied directly from the supplier by a truck. A shipment of up to a full truckload, which was more than 5000 jackets, was charged a flat fee of $2,200. What is the optimal order quantity each store should order? What is the total the inventory and ordering costs with this quantity?
(b) Is EOQ calculated using the cost price of $250 or sale price of $325. Why?
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