The Super Fresh Grocery Store carries a brand of tea with following characterist
ID: 331423 • Letter: T
Question
The Super Fresh Grocery Store carries a brand of tea with following characteristics:
Sales = 4000 cases per year
Ordering cost = $200 per order
Carrying charge = 20% per year
Item cost = $50
Number of working days per year = 250 days
a(4). How many cases should be ordered at a time?
b(4). How often tea will be ordered, i.e., what is the time between orders?
c(6). What is the annual cost of ordering and carrying tea?
d(6). What is the effect on EOQ and the total cost if the sales next year are increased by 500 cases and the ordering cost is reduced to $100 per order.
Explanation / Answer
Given are following details :
Annual demand of cases = D = 4000
Ordering cost = Co = $200
Annual inventory carrying cost = Ch = 20% of $50 = $10
Number of cases should be ordered ( EOQ ) = Square root ( 2 x Co x D / Ch ) = Square root ( 2 x 200 x 4000/10) = 400
400 CASES SHOULD BE ORDERED AT A TIME
Daily demand = Annual demand / Effective number of days in a year = 4000/250 = 16
Therefore , time between orders = EOQ/ Daily demand = 400/16 days = 25 days
TIME BETWEEN RODERS = 25 DAYS
Annual ordering cost
= Ordering cost x Number of orders
= Ordering cost x annual demand / EOQ
= Co x D/EPQ
= $ 200 x 4000/400
= $2000
Annual inventory holding cost
= Annual unit inventory cost x average inventory
= Ch x EOQ/2
= $10 X 400/2
= $2000
Annual cost of ordering and carrying tea = $2000 + $2000 = $4000
ANNUAL COST OF ORDERING AND CARRYING TEA = $ 4000
Revised sales next year = D1 = 4000 + 500 = 4500
Revised ordering cost = Co1 = $ 100
Revised EOQ = Square root ( 2 x Co1 x D1/ Ch ) = Square root ( 2 x 100 x 4500 / 10 ) = 300
Annual ordering cost
= Ordering cost x Number of orders
= Ordering cost x annual demand / EOQ
= Co1 x D/EPQ
= $ 100 x 4500/300
= $ 1500
Annual inventory holding cost
= Annual unit inventory cost x average inventory
= Ch x EOQ/2
= $10 X 300/2
= $1500
Annual cost of ordering and carrying tea = $1500 + $1500 = $3000
REVISED EOQ = 300
REVISED ANNUAL COST OF ORDERING AND CARRYING TEA = $3000
400 CASES SHOULD BE ORDERED AT A TIME
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