Problem 13-3 A large bakery buys flour in 25-pound bags. The bakery uses an aver
ID: 447373 • Letter: P
Question
Problem 13-3 A large bakery buys flour in 25-pound bags. The bakery uses an average of 4,500 bags a year. Preparing an order and receiving a shipment of flour involves a cost of $10 per order. Annual carrying costs are $75 per bag. a. Determine the economic order quantity. (Do not round intermediate calculations. Round your final answer to the nearest whole number.) Economic order quantity bags b. What is the average number of bags on hand?(Round your answer to the nearest whole number.) Average number of bags c. How many orders per year will there be? (Round your final answer to the nearest whole number.) Number of orders per year d. Compute the total cost of ordering and carrying flour. (Round your answer to 2 decimal places. Omit the "$" sign in your response.) Total cost $ e. If holding costs were to increase by $9 per year, how much would that affect the minimum total annual cost?
Explanation / Answer
Annual Demand 4500 Ordering Cost $ 10.00 Holding Cost $ 75.00 a. EOQ = 2AO / H where A = Annual Demand O = Ordering Cost per order H = Holding Cost per unit per annum a. EOQ = 2AO / H = (2 * 4500 * 10) / 75 = 34.64 units or, 35 units b. Average number of bags in hand = EOQ/2 = 35/2 = 17.5 c. No of orders per year = Annual Demand / EOQ = 4500 /35 = 129.904 = 130 orders per year d. Total holding cost plus the ordering cost = Ordering Cost per order * No of orders + Average Inventory * Holding cost per unit p.a. = 10 * 130 + 17.5 * 75 = $2612.50 e. When Holding Cost increase by $9 to $84, new EOQ will be calculated as below EOQ = 2AO / H = (2 * 4500 * 10) / 84 = 32.73 units or, 33 units Average number of bags in hand = EOQ/2 = 33/2 = 16.50 No of orders per year = Annual Demand / 34 = 4500 /34 = 137.48 = 137 orders per year Total holding cost plus the ordering cost = Ordering Cost per order * No of orders + Average Inventory * Holding cost per unit p.a. = 10 * 137 + 16.50 * 84 = $2756 Increase in Minimum Cost = $2756 - $2612.50 = $143.50