Finding the cost minimizing order quantity in the given case
Keith Shoe Stores carries a basic black men's dress shoe that sells at an approximate constant rate of 500 pairs of shoes every three months. Keith's current buying policy is to order 500 pairs each time an order is placed. It costs Keith $30 to place an order. The annual holding cost rate is 20%. With the order quantity of 500, Keith obtains the shoes at the lowest possible unit cost of $28 per pair. Other quantity discounts offered by the manufacturer are as follows.
Order Quantity Price per Pair
0-99 $36
100-199 $32
200-299 $30
300 or more $28
What is the minimum cost order quantity for the shoes? What are the annual savings of your inventory policy over the policy currently being used by Keith?