Jan Kottas is the owner of a small company that buys and resells electric knives used to cut fabric. The annual demand is for 8,000 knives, and Jan is currently buying from Knives-R-Us. The ordering cost is $100 per order. The carrying cost per year is 4% of the acquisition cost of the knife, which is $20.00.
a) Using the economic order quantity, how many knives should Jan order in each order? Why?
b) Jan has been approached by Knives-R-Us about buying knives under a new pricing pattern. One option is to order them in quantities between 1600 and 1699. If she does this, Knives-R-Us will lower the acquisition price to $19.75 each. If she buys 1700 or more at a time, the company will lower the price to $19.50. Considering the total inventory cost, including the acquisition cost of the knives, how many should she buy per order? Of course, she can still by that at $20.00 per knife.
c) Jan has decided not to pursue either option offered in part b). So Knives-R-Us has given her another option. She can buy her entire year's demand for knives in two equal quantities, half on January 1 and the half on July 1. If she does this, they would help by giving her a rebate (or refund) on her ordering cost. This would result in the ordering cost being $0. They would also lower the price to $19.90 per knife. Considering all of the costs, should Jan take this option or the option offered in part a)?
This posting contains solution to following problem on Knives-R-Us's inventory policy: