Question

A neighborhood sportswear store sells a pair of victoria sneakers for $40. due to the recent fitness craze, these shoes are in high demand: 50 pairs of shoes are sold per week. the ordering cost is $20 per order, and the annual holding cost is 20% of selling price. if the store operates 52 weeks a year, what can you say about the current lot size of 235? too large too small just right cannot tell from the information given.

Answer 1

The current lot size of 235 is too large.

We use the given data to find the Economic Order Quantity or EOQ and then compare it to the lot size of 235.

Economic Order Quantity is used to arrive at the optimum purchase order for goods (in number of units) while minimizing ordering and handling costs.

The formula for calculating EOQ is:

Q = $\sqrt{2DS/H}$,

where :

Q is the order lot in number of units

D is the annual demand for the product

S is ordering cost per order (in $)

H is holding cost per unit (in $)

We can arrive at the annual demand for the product as follows:

Annual Demand = No. of units sold per week * No. of weeks the store operates

Annual Demand = 50*52 = 2600 units

Order cost = $20

Holding Cost = Holding Cost (in %) * Selling Price

Holding Cost = 20%*$40 = $8

Substituting the above values in the EOQ formula, we get,

Q = $\sqrt{(2*2600*20)/8}$ = 114.02 units.

Comparing the EOQ we just calculated and the given lot size, we arrive at the answer above.