Victor sells a line of upscale evening dresses in his boutique.

He charges $300 per dress, and sales

average 30 dresses per week. Currently, Victor orders a 10-week supply at a time from the
manufacturer. He pays $150 per dress, and it takes two weeks to receive each delivery. Victor estimates
his administrative cost of placing each order at $225. Because he estimates his cost of inventory at
20%, each dollars worth of idle inventory costs him $0.30 per year.
a. Compute Victors total annual cost of ordering and carrying inventory.
C = $150
R = 30 * 52 = 1560 / yr
Q_current = 300;
R/Q = 5.2;
S*R/Q = 225 * 5.2 = $1170 = total setup cost
h=0.20 and H=h*C = 0.2 * 150 = $30 / yr
H*Q/2 = $30 * 300 / 2 = $4500 = total holding cost
C*R = 150 * 1560 = $234000 = total material cost
TC(current) = total setup cost + total holding cost + total material cost = 1170 + 4500 + 234 000
= $239 670

b. If he wishes to minimize his annual cost, when and how much should Victor order in each batch?
Q_prop = sqrt ( 2 RS/H) = sqrt ( 2 * 1560 * 225 / 30 ) = 153
Since lead time is L = 2 weeks, he should order when his inventory reaches the ROP (re-oder point)
ROP = L * R = 2 weeks * 30 / week = 60 dresses
What will be his annual cost?
S* R/Q = 225 * 1560 / 153 = 225 * 10.2 = $2294
H * Q /2 = $30 * 153 /2 = $2295
C*R = $234000
TC (proposed) = sum of all = 2294 + 2295 + 234000 = $238 589
c. Compare the number of inventory turns under the current and proposed policies.
Turn(current) = 2R / Q_curr = 2 * 1560 / 300 = 14.4 /yr
Turn(proposed) = 2R/Q_prop = 2 * 1560 / 153 = 20.4 /yr