### Determine the economic order quantity and total annual cost

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The Greenfield Hobby Shop carries a line of radio-controlled model racing cars. Demand for the cars is assumed to be constant at a rate of 40 cars per month. The cars cost \$60 each, and ordering costs are approximately \$15 per order, regardless of order size. The annual holding cost rate is 20%.

a. Determine the economic order quantity and total annual cost under the assumption that no backorders are permitted.

b. Using a \$45 per-unit-per-year backorder cost, determine the minimum cost inventory and total annual cost for the model racing cars.

c. What is the maximum number of days a customer would have to wait for a backorder under the policy in part (b). Assume that the Hobby Shop is open for business 300 days per year.

d. Would you recommend a no-backorder or a backorder inventory policy for this product? Explain.

e. If the lead time is six days, what is the reorder point for both the no-backorder and backorder inventory policies?

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