Rob Roller has been in charge of inventory policy at Cyclorama, a large retail bicycle shop in Orlando, Florida. He now orders Chrome-Moly frames from Frameco, a local frame supplier. Cyclorama builds each bike by adding different Shimano component groups to each frame. Currently, cyclorama’s annual demand for frames is 2,000 per year. The lead time is 10 days, and the ordering cost per order is $50. The holding cost is estimated to be 25% of the unit cost. Frameco offers the following discounts:
a) What are the optimal order quantity and the total inventory cost for Cyclorama given the data?
(b) Rob is optimistic about future demand. If annual demand becomes 3,000 frames, what is the impact on the optimal order quantity?
(c) What is the impact if the annual demand is 4,000 frames?
(d) In general, what happens to the order quantity and total inventory cost as demand increases?
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