To be calculated : a) Optimal order quantity b) Optimal order quantity with chan
ID: 373779 • Letter: T
Question
To be calculated:
a) Optimal order quantity
b) Optimal order quantity with changed prices of teff flour
c) Reorder point
Given Information:
Annual Demand = 1250 lbs
Cost of teff flour = $4 per lb
Order cost or setup cost = $15
Lead time = 4 weeks
Holding cost per unit per year = 90% of $4 = $3.6 per lb
Safety stock = 55 lbs
Solution:
Part A
Economic order quantity or Optimal order quantity is calculated as:
Q* = 2 x annual demand x cost per order / holding cost per unit per year
Q* = 2 x 1250 x 15 / 3.6
Q* = 10417
Q* = 102 lbs
Optimal order quantity is 102 lb
Part B
Old cost of teff flour = $4 per lb
New cost of teff flour = $10 per 60 oz (1 lb = 16 oz)
Therefore, New cost of teff flour (in lb) = $2.66 per lb.
Assuming, cost of ordering remains the same i.e. $15
New holding cost per unit per year = 90% of $2.66 = $2.39 per lb
Economic order quantity or Optimal order quantity is calculated as:
Q* = 2 x annual demand x cost per order / holding cost per unit per year
Q* = 2 x 1250 x 15 / 2.39
Q* = 15690
Q* = 125 lbs
New Optimal order quantity is 125 lbs
Explanation: The new optimal order quantity has increased from 102 lb to 125 lb. This is because of the reduction in prices of the teff flour and the cost of ordering remaining the same, there is a significant reduction in the holding cost per unit per year. With reduced holding costs, Honeywell bakery will be able to store more flour in its storage and thus, they can afford to increase the optimal order quantity.
Part C
Lead time (M) = 4 weeks = 28 days
Annual demand = 1250 lb
Number of weeks in the year = 52 weeks
Therefore, Demand per week = 24.04 lb
Demand per day (D) = 3.43 lb
Safety stock = 55 lb
Reorder point can be calculated as:
Reorder Level = Safety Stock + (Average Daily Usage × Lead Time)
where, R = Reorder point, D = Demand per day, M = Lead time for new order in days
R = 55 + (3.43 x 28)
R = 151.04 lb
Therefore, reorder point is 151.04 lb
Explanation / Answer
Honeywell Bakery buys teff flour for use in its gluten-free baked goods production at $4 per lb with an order cost of $15 and a lead time of 4 weeks. The flour is needed throughout the entire 52-week year, with an annual demand of 1,250 lbs. Honeywell's holding cost for teff flour is 90% of the item cost and they keep a safety stock of 55 lbs. (Note: 1 lb = 16 oz) a) Compute the optimal order quantity. (2 points) b) Compute the optimal order quantity if the price of teff flour changes to $10 per 60 oz. Is this order quantity different from the one in a? If so, explain the difference. (2 points) c) What is the reorder point for the teff flour? (3 points) Note: 1 lb = 16 oz
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