You are the buyer for your university bookstore. One of the textbooks has a cost to you of $104 and you sell it to students for $208. In this case, however, you cannot salvage any value from copies that do not sell because a new edition is published every semester. Demand for this text averages 100 copies each semester, with a standard deviation of 10 copies.
How many should you order each semester?
Step 1 of 3
Step-1: Calculate the cost of a stockout (Cso) of the item using the following formula as shown below:
Cost of a stockout ( C so ) of the item is $40.
To determine how many textbooks you should order each semester, we can use the inventory management concept called the Economic Order Quantity (EOQ). The EOQ formula calculates the optimal order quantity based on the cost of ordering and holding inventory.
The formula for EOQ is:
EOQ = √(2DS/H)
Where:
D = Demand per period (in this case, average demand of 100 copies per semester)
S = Ordering cost per order (unknown in the given information)
H = Holding cost per unit per period (known as the cost to you of $104)
To find the ordering cost per order (S), we need additional information. The ordering cost can include costs associated with placing the order, such as administrative expenses, shipping costs, or any additional costs specific to your bookstore. Once you have the ordering cost per order, you can substitute it back into the EOQ formula to calculate the optimal order quantity.
It's important to note that EOQ assumes constant demand and does not consider any variability. However, given the standard deviation of demand (10 copies), you might want to consider implementing a safety stock to account for this variability and avoid stockouts during periods of higher demand.
Ultimately, to determine the quantity you should order each semester, you need to calculate the EOQ using the formula above and include any additional considerations based on your specific situation.