The Miller Brewing. has developed a new type of Beer. The local distributor expe
ID: 2756216 • Letter: T
Question
The Miller Brewing. has developed a new type of Beer. The local distributor expects to increase his sales by 20% over the past year due to this new development. Last year's sales were $50,000 at a selling price of $100 per unit. A safety stock of 23 units has eliminated stock outs. The manager would like to cut costs as much as possible and comes to you for advice.
Warehouse space
$2.50/unit
Material Handling Expense
$1.50/unit
Insurance Premium
$1.00/unit
Total ordering cost
$100.00/per order
What is the economic order quantity?
How many orders will be made per year?
What is the total cost of this inventory decision?
Warehouse space
$2.50/unit
Material Handling Expense
$1.50/unit
Insurance Premium
$1.00/unit
Total ordering cost
$100.00/per order
Explanation / Answer
a) economic order quantity :-
= (2 * Annual demand Quantity in units * ordering cost per order/ Annual carrying cost per unit) 1/2
= ( 2 * 600 * $100 /$ 5)1/2
= (120000 / 5 )1/2
= (24000)1/2
= 155 units
Note;- Annual units = $50000 / $100per units + 20% * ($50000 / $100)
= 500 + 100
= 600 units
Carrying cost = Warehouse space cost + material handling cost + Insurance cost
= $2.50 + 1.50 + 1
= $5
b) orders will be made per year = Annual Demand in Units / Economic Order Quantity
= 600Units / 155
= 3.9
=4 orders
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