Effect of management evaluation criteria on EOQ model. Rugged Outtters purchases one model of mountain bike at a wholesale cost of $520 per unit and resells it to end consumers. The annual demand for the company’s product is 49,000 units. Ordering costs are $500 per order and carrying costs are $100 per bike per year, including $40 in the opportunity cost of holding inventory. 1. Compute the optimal order quantity using the E0Q model.2. Compute (a) the number of orders per year and (b) the annual relevant total cost of ordering and car-rying inventory.3. Assume that when evaluating the manager, the company excludes the opportunity cost of carryinginventory. If the manager makes the E0Q decision excluding the opportunity cost of carrying inventory,the relevant carrying cost would be $60, not $100. How would this affect the E0Q amount and the actualannual relevant cost of ordering and carrying inventory?4. What is the cost impact on the company of excluding the opportunity cost of carrying inventory whenmaking E0Q decisions? Why do you think the company currently excludes the opportunity costs of car-rying inventory when evaluating the manager's performance? What could the company do to encour-age the manager to make decisions more congruent with the goal of reducing total inventory costs?Required

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Answered: 1. Compute the optimal order quantity…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Effect of management evaluation criteria on EOQ model. Rugged Outtters purchases one model of mountain bike at a wholesale cost of $520 per unit and resells it to end consumers. The annual demand for the company’s product is 49,000 units. Ordering costs are $500 per order and carrying costs are $100 per bike per year, including $40 in the opportunity cost of holding inventory.

1. Compute the optimal order quantity using the E0Q model.
2. Compute (a) the number of orders per year and (b) the annual relevant total cost of ordering and car-
rying inventory.
3. Assume that when evaluating the manager, the company excludes the opportunity cost of carrying
inventory. If the manager makes the E0Q decision excluding the opportunity cost of carrying inventory,
the relevant carrying cost would be $60, not $100. How would this affect the E0Q amount and the actual
annual relevant cost of ordering and carrying inventory?
4. What is the cost impact on the company of excluding the opportunity cost of carrying inventory when
making E0Q decisions? Why do you think the company currently excludes the opportunity costs of car-
rying inventory when evaluating the manager's performance? What could the company do to encour-
age the manager to make decisions more congruent with the goal of reducing total inventory costs?
Required

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