Garden Variety Flower Shop uses 710 clay pots a month. The pots are purchased at
ID: 367979 • Letter: G
Question
Garden Variety Flower Shop uses 710 clay pots a month. The pots are purchased at $2.20 each. Annual carrying costs per pot are estimated to be 50 percent of cost, and ordering costs are $30 per order. The manager has been using an order size of 1,000 flow pots. a.What additional annual cost is the shop incurring by staying with this order size? (Round your optimal order quantity to the neare whole number, Round all other intermediate calculations and your final answer to 2 decimal places. Omit the "$" sign in your response.) Additional annual cost $ b.Other than cost savings, what benefit would using the optimal order quantit y yield (relative to the order size of 1,000)? (Use the order quantity from Part a. Round your final answer to the nearest whole percent. Omit the "3 sign in your response.) About % of the storage space would be needed.Explanation / Answer
Optimal order quantity = sqrt(2DS/H)
D - Annual Demand
S- Ordering cost per order
H- Holding cost per unit
D = 710* 12 = 8520
S - $30
H- 50% of cost = 0.5*2.2 = $ 1.1
Optimal order quantity = sqrt((2*8520*30)/1.1) = 681.7 = 682( rounding off)
Under Optimal order quantity,
Total Cost = (Order quantity/2) * Holding cost + Ordering cost *( Annual demand/Order quantity)
=(682/2)*1.1+30*(8520/682) = $ 749.88 = $750
When order size is 1000,
Total cost =(1000/2)*1.1+30*(8520/1000) = $ 805.6
Therefore,
Additional Annual cost = 805.6-750 = $55.6
b)
Average inventory when optimal qty order is 682/2 = 341
Average inventory when lot size of 1000 is used = 500
% of space used more = ((500-341)/341)*100 = 46.63%
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