The campus bookstore sells 4,000 sets of graduation regalia each year. Placing an order from their supplier costs $25 regardless of order quantity, so they usually place a large order (a half year's supply)at a time. It costs $5 per year to hold a cap and gown in inventory, primarily insurance costs for the highly flammable material. What is the difference in their holding cost if they order at their optimal order quantity compared to their current policy?
A)$4,500
B)$4,400
C)$4,200
D)$4,000

Question

Quizplus · Accepted Answer

The optimal order quantity is the square root of (2*D*O)/H, where D is annual demand, O is ordering cost, and H is holding cost. In this case, D = 4,000, O = $25, and H = $5. So, the optimal order quantity is sqrt(2*4000*25)/5 = 400. The current policy is to order a half year's supply, or 2,000 units. The holding cost for the optimal order quantity is 400 * $5 = $2,000. The holding cost for the current policy is 2,000 * $5 = $10,000. So, the difference in holding cost is $10,000 - $2,000 = $8,000.

The Campus Bookstore Sells 4,000 Sets of Graduation Regalia Each