1. A bakery uses 80 bags of chocolate chips each year. The chocolate chips are p
ID: 366975 • Letter: 1
Question
1. A bakery uses 80 bags of chocolate chips each year. The chocolate chips are purchased from a supplier for a price of $80 per bag and an ordering cost of $20 per order. Bakery A’s annual inventory holding cost percentage is 40%. The bakery order chocolate chip bags 2 times every year. What is their total annual cost of ordering and holding inventory?
800
1360
680
168
2. A company sells 600 bottles of a dietary supplement per week at $100 per bottle. The supplement is ordered from a supplier who charges fixed cost of $30 per order, and $50 per bottle. The annual inventory holding cost is 40%. Assume the company operates 50 weeks in a year. What is the optimal number of bottles company should order?
300
212
42
30
800
Explanation / Answer
1)
Order Size = Demand/no. of orders = 80/2 = 40 bags per order
Annual Ordering Cost = no. of orders x cost per order = 2 x 20 = $40
Annual holding Cost = Average inventory x holding charge x unit cost
Annual holding Cost = (Q/2) x I x C = 40/2 x 0.4 x 80 = $640
Annual Ordering and Holding cost = 4 + 640 = $680
2)
Annual demand(D) = 600X50 = 30000 bottles
Ordering cost(S) = $30 per order
Purchase price for the company = $50 per bottle
Holding cost(H) = 40% of the purchase price = 40% of 50 = $20
Order quantity that minimizes the company's total ordering and holding cost per year is the economic order quantity(EOQ)
So.EOQ = Sqrt of (2DS/H)
= SQrt of [(2X30000X30) / 20]
= Sqrt of 90000
= 300 bottles.
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