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Kris Lee, the owner of the Quality Hardware Store, is reassessing his inventory policy for hammers.He sells an average of 50 hammers per month, so he has been placing an order to purchase 50 hammers from a wholesaler at a cost of $20 per hammer at the end of each month.However, Kris does all the ordering for the store himself and finds that this is taking a great deal of his time. He estimates that the value of his time spent in placing each order for hammers is $75.

[Note:you may use the EOQ formula result:Q*=(2DS/h)^1/2 to help you with your calculations.]

a)What would the unit holding cost for hammers need to be for Kris's current inventory policy to be optimal according to the basic EOQ model?What is this unit holding cost as a percentage of the unit acquisition cost?[4 points]

b)What is the optimal order quantity if the unit holding cost actually is 20% of the unit acquisition cost?What is the total corresponding annual variable cost?What is the total annual variable cost of the current inventory policy?[5 points]

c)If the wholesaler typically delivers an order of hammers in 5 working days (out of 25 working days in an average month), what should the reorder point be (according to the basic EOQ model)?[2 points]

d)Kris doesn't like to incur inventory shortages of important items.Therefore, he has decided to add a safety stock of five hammers to safeguard against late deliveries and larger-than-usual sales .How would you expect this policy change to affect each of the components of annual variable cost and the optimal order quantity (a qualitative answer is sufficient).Hint:you may find a graph of cost vs quantity helpful in formulating and/or explaining your answer.[4 points]

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