Problem 1: Economic Order Quantity.
Genuine Gems orders a full month’s worth of precious stones at the beginning of every month. Over the course of the month, it sells off its stock, at which point it restocks inventory for the following month. It sells 200 gems per month, and the monthly carrying cost is $1 per gem. The fixed order cost is $20 per order. Should the firm adjust its inventory policy? If so, should it order smaller stocks more frequently or larger stocks less frequently?
Problem 2: Terms of Sale.
Microbiotics currently sells all of its frozen dinners cash on delivery but believes it can increase sales by offering supermarkets 1 month of free credit. The price per carton is $50 and the cost per carton is $40.
a. If unit sales will increase from 1,000 cartons to 1,060 per month, should the firm offer the credit? The interest rate is 1 percent per month, and all customers will pay their bills.
b. What if the interest rate is 1.5 percent per month?
c. What if the interest rate is 1.5 percent per month, but the firm can offer the credit only as a special deal to new customers, while old customers will continue to pay cash on delivery?