Steve?s shop sells sea shells by the sea shore.Steve buys shells from local collectors for an average price of $0.5 per shell.Steve sells on average 1000 shells each month.Each time he orders shells from collectors, there is a $20 shipping and handling fee.Steve estimates a unit holding cost of $0.5 per shell per year (many of them get broken if held in inventory too long).How often should Steve order sea shells?

Question

Quizplus · Accepted Answer

To determine the optimal order quantity and frequency, we can use the Economic Order Quantity (EOQ) formula:

EOQ = √(2DS/H)

where:
D = demand (in units per year)
S = ordering cost (in dollars per order)
H = holding cost per unit per year

In this case, we know that:
D = 1000 shells per month * 12 months = 12,000 shells per year
S = $20 per order + $0.5 per shell = $20.5 per order
H = $0.5 per shell per year

Plugging these values into the EOQ formula, we get:

EOQ = √(2 * 12,000 * $20.5 / $0.5) ≈ 1,383

This means that Steve should order about 1,383 shells at a time to minimize his total inventory costs. Since he sells 1,000 shells each month and his EOQ is higher than that, he should order shells about once a month. Therefore, the best choice is B.

Steve?s Shop Sells Sea Shells by the Sea Shore