1. 52 weeks in a year is considered in this problem. 1. Economic order quantity
ID: 373973 • Letter: 1
Question
1.
52 weeks in a year is considered in this problem.
1.
Economic order quantity = (2*annual demand*setup cost/holding cost)^.5
Economic order quantity = (2*52*45*300/(.25*120))^.5
Economic order quantity = 216.33 or 216 cases
2.
If 300 cases are ordered each time,
Total annual ordering and holding costs = Annual ordering cost + annual holding cost
Total annual ordering and holding costs = (52*45/300)*300 + (300/2)*(.25*120)
Total annual ordering and holding costs = $6840
3.
If 100 cases are ordered each time,
Total annual ordering and holding costs = Annual ordering cost + annual holding cost
Total annual ordering and holding costs = (52*45/100)*300 + (100/2)*(.25*120)
Total annual ordering and holding costs = $8520
4.
It should be either 200 or 250 as these multiples are nearest to the economic order quantity of 216.
If it is 200 cases,
Total annual ordering and holding costs = (52*45/200)*300 + (200/2)*(.25*120) = $6510
If it is 250 cases,
Total annual ordering and holding costs = (52*45/250)*300 + (250/2)*(.25*120) = $6558
Hence, the lowest total annual ordering and holding cost is achieved at 200 cases per order.
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Explanation / Answer
1. Millennium Liquors is a wholesaler of sparkling wines. Its most popular product is the French Bete Noire, which is shipped directly from France. Weekly demand is 45 cases. Millennium purchases each case for $120, there is a $300 fixed cost for each order (independent of the quantity ordered), and its annual holding cost is 25 percent.
1. What order quantity minimizes Millennium’s annual ordering and holding costs?
2. If Millennium chooses to order 300 cases each time, what is the sum of its annual ordering and holding costs?
3. If Millennium chooses to order 100 cases each time, what is the sum of the ordering and holding costs incurred by each case sold?
4. If Millennium is restricted to ordering in multiples of 50 cases (e.g., 50, 100, 150, etc.), how many cases should it order to minimize its annual ordering and holding costs? 5. Millennium is offered a 5 percent discount if it purchases at least 1000 cases. If it decides to take advantage of this discount, what is the sum of its annual ordering and holding costs?
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