Home Depot, Inc. is the world's largest home improvement retailer and one of the ten largest retailers overall in the United States. The firm operates more than 1,400 full-service, warehouse-style stores. Each store stocks between 40,000 and 50,000 different kinds of building materials, home improvement supplies, and lawn and garden products. Its customers are primarily do-it-yourselfers. Suppose that Home Depot is considering stocking a new deluxe toilet unit in its bathroom fixtures department. According to the case, Home Depot is trying to broaden its product line to appeal to home-improvement contractors. The initial conditions are: sales will average 1,000 units per year; it will cost $100 to keep a unit in inventory for a year; the fixed reordering cost is $80; and Home Depot pays a purchase price of $500 per unit.
Answers to the following questions:
1. Derive the EOQ's, and explain how it works. Illustrate your answer.
2. What is Home Depot's EOQ for the deluxe toilet units?
3. Using the EOQ, what is the average inventory, number of orders per year, and the total annual cost of maintaining the inventory of deluxe toilet units?
4. What would the EOQ be if expected sales were 2,000 units per year, ordering cost was $160, and the carry cost was $200?
5. Explain the main differences between the EOQ and the Baumol's model.