Inventory with shortage of stock allowance

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Reference no: EM1315856

Evaluation of EOQ - Inventory with shortage of stock allowance

The bookstore at Smith College purchases sport shirts with the college logo to sell from a local vendor.   The vendor sells the sport shirts to the college for $38 each.  The cost to the bookstore for placing each order is $120.  The carrying cost is $5.20 per shirt per year.   The bookstore estimates that 1700 sport shirts will be sold over the next year and does not want any shortages.  The bookstore sells the shirt for $50 each.   There are 260 business days a year for the bookstore.   Lead time for filling an order once placed is 2 weeks.   The vendor has offered the College Bookstore the following discounts:

Order Size


% of Order

Cost of Shirts from Vendor


0% discount



2% discount



4% discount



6% discount


Assuming the local vendor eliminates it's discounts and charges a flat rate of $35 per shirt.  The bookstore is considering allowing backorders if it is profitable to do so.  They determine their shortage cost per shirt to be $7.50.  Should the bookstore allow shortages?  Explain the basis for your answer.

Reference no: EM1315856


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