Eagle Home Goods manufactures home appliances. The company purchases a critical component for one of its most popular products from a vendor in Asia. Eagle’s annual need for this component is 2250 units. Eagle’s carrying cost per unit per year is estimated to be 15% of the cost of the item. Currently, the vendor charges Eagle $60 per unit. Eagle incurs $20 every time an order is placed from the vendor. The replenishment lead time for the component is 15 days. Eagle operates 250 days a year.
a) What is the EOQ for this component?
b) What is Eagle’s total annual cost of ordering and holding inventory when EOQ is used?
c) What is Eagle’s total annual cost, including the cost of the components purchased?
d) Suppose the vendor proposes the following quantity discount to Eagle: if Eagle places orders of 200 units or more in each replenishment, the vendor will charge Eagle only $55 per unit.
i. What is the optimal order quantity that minimizes the annual cost of ordering, inventory carrying, and purchasing if Eagle accepts this proposal? What is the resulting annual total cost?
ii. Should Eagle accept this proposal? Explain clearly why or why not. Justify your answer with facts and figures.