Question

A wholesale distributor of bicycles is having trouble with shortages of a popular model (a small, one-speed girl’s bicycle) and is currently reviewing the inventory policy for this model. The distributor purchases this model bicycle from the manufacturer monthly and then supplies it to various bicycle shops in the western United States in response to purchase orders. The monthly demand of the bicycles is 50,000 bikes. The cost per bicycle is $40 and the administration cost for placing an order is $300. The holding cost is $2 per bicycle. Shortage cost is $20 per month per bicycle.

Find:

1. EOQ

2. If shortages are allowed find EOQ, Optimal storage and Max shortage.

Answer 1