Question

Q1. Old World Charm, Inc. specializes in selling scented candles. The company has established a policy of reordering inventory every other month (which is 6 times per year). A recently employed MBA has considered New England's inventory problem from the EOQ model viewpoint. If the following constitute the relevant data, what is the extra total cost of the current policy compared with the total cost of the optimal policy?

Ordering cost = $10 per order

Carrying cost = 20% of purchase price

Purchase price = $15 per unit

Total sales for year = 1,000 units

Safety stock = 0

Q2. Suppose that 1 British pound currently equals 1.42 U.S. dollars and 1 U.S. dollar equals 1.62 Swiss francs. What is the cross-exchange rate between the pound and the franc? Please express your answer in terms of how many Swiss francs per British pound.

Answer 1

1.

Annual Demand = D = 1000/year

Ordering Cost = C_o = $10

Holding Cost = C_c = 20% of $15 = $3/year

Economic Order Quantity Q* = √(2DC_o/C_c) = √(2*1000*10/3) = 81.65

Annual Inventory Holding cost = average inventory * unit carrying cost = (Q*/2)*C_c = (81.65/2)*3 = $122.47

Annual Order cost = Number of orders * cost/order = (D/Q*) C_o = (1000/81.65)*10 = $122.47

Hence, Total Annual Cost = Annual Inventory Holding Cost + Annual Order Cost = 122.47 + 122.47 = $244.94

2. Given, 1 GBP = 1.42 USD and

1 USD = 1.62 CHF

=> GBP / USD = 1.42

USD / CHF = 1.62

=> (GBP / USD) * (USD / CHF) = 1.42 * 1.62

=> GBP / CHF = 2.30

=> 1 GBP = 2.30 CHF

where, GBP = British Pound, USD = US Dollars, CHF = Swiss Francs