### Fixed order cost-variable order cost and holding cost rate

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George Burdell has graduated from ISyE and starts his own home improvement business. One of the main products he sells are washers; the demand for washers is constant at 1000 units per year. George pays his supplier \$200 for each washer, and the fixed order cost to place the order is \$2,500. Holding costs are based on an annual interest rate of 5% applied to the variable order cost.

a) What are the demand, fixed order cost, variable order cost and holding cost rate?

b) How much should George order?

c) What is George’s total cost over one order cycle?

d) How often does George place an order?

George also sells dryers, and their annual demand is 800 units and each one costs \$150. The fixed order cost for dryers is also \$2,500. After some negotiation, his supplier agrees to charge him \$2,500 for a joint order that includes both washers and dryers. George thinks this will save him some money, but isn’t sure how to manage washer and dryer inventory jointly.

e) What should George’s washer and dryer order quantities be if ordered jointly?

f) What is George’s total annual cost under this setup?

g) Does George save money by jointly ordering, and how much if so?

Suppose George Burdell has grown his business and now also sells water heaters. He rents a warehouse to store the heaters, paying \$1.5 per unit per month for up to 300 units. Because of limited space, he has to pay an extra 10% for each unit above 300 (\$1.65). Assume the fixed order cost is \$1,152 and the variable order cost is \$50 per unit. The holding cost is \$1 per unit per month and demand is 256 units per month.

h) How many heaters should George order when placing an order?

i) How often should he order?

j) What is the total monthly cost?

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