Problem 13-3 A large bakery buys flour in 25-pound bags. The bakery uses an aver
ID: 445569 • Letter: P
Question
Problem 13-3
A large bakery buys flour in 25-pound bags. The bakery uses an average of 4,600 bags a year. Preparing an order and receiving a shipment of flour involves a cost of $10 per order. Annual carrying costs are $75 per bag.
Determine the economic order quantity. (Do not round intermediate calculations. Round your final answer to the nearest whole number.)
What is the average number of bags on hand?(Round your answer to the nearest whole number.)
How many orders per year will there be? (Round your final answer to the nearest whole number.)
Compute the total cost of ordering and carrying flour. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)
If holding costs were to increase by $9 per year, how much would that affect the minimum total annual cost? (Round your answer to 2 decimal places. Omit the "$" sign in your response.)
A large bakery buys flour in 25-pound bags. The bakery uses an average of 4,600 bags a year. Preparing an order and receiving a shipment of flour involves a cost of $10 per order. Annual carrying costs are $75 per bag.
Explanation / Answer
Ans:
4600 = D
$10 = S
$75 = H
A
EOQ = Square root of ( 2*D*S / H)
EOQ = Square root of ( 2*4600*10 / 75) = 35.023 = 36 bags
B
Average = 36/2 = 18 bags
C
Number of orders per year = 4500/34.64 or 4500/35 = 129 or 130.
D
TC = (Q/2) * H + (D/Q)*S
TC = (36/2)*75 + (4600/36)*10
TC = 1350 + 1277.77 = 2627.77
E
If the holding cost were to increase by $9 per year, EOQ = SQRT {(2*4500*10)/84} = 33 bags
Total cost = SQRT (2*4500*10*84) = 2749.55
Increase = 2749.55 - 2598.08 = 151.47 approximately
The realistic value of increase may be calculated by comparing two scenarios of placing orders of sizes 35 and 33 with carrying costs of 75 and 84 respectively and ordering cost of 10 per order in both the cases.