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
|
Discount
% of Order
|
Cost of Shirts from Vendor
|
|
1-299
|
0% discount
|
$38
|
|
300-499
|
2% discount
|
$37.24
|
|
500-799
|
4% discount
|
$36.48
|
|
800+
|
6% discount
|
$35.72
|
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.