The Soft Goods Department of a Large Department Store Sells

question 128

Essay

The soft goods department of a large department store sells 175 units per month of a certain large bath towel.The unit cost of a towel to the store is $2.50 and the cost of placing an order has been estimated to be $12.00.The store uses an inventory carrying charge of I = 27% per year.Determine (a)the optimal order quantity, (b)the order frequency,and (c)the annual holding and setup cost.If,through automation of the purchasing process,the ordering cost can be cut to $4.00,what will be (d)the new economic order quantity, (e)the order frequency,and (f)annual holding and setup costs? Explain these results.

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Definitions:

Trade Acceptance

A written promise or a draft by one party, the seller, to another, the buyer, to pay a specified sum of money at a future date.

Sight Draft

A financial instrument that is payable on demand when presented to the drawee.

Net Present Value

is a method used in capital budgeting to evaluate the profitability of an investment or project by calculating the difference between the present value of cash inflows and outflows.

Credit Sale

A transaction where the buyer is allowed to pay for goods or services at a later date, as opposed to paying at the time of sale.