Joe Birra needs to purchase malt for his microbrewery production. His supplier c
ID: 375274 • Letter: J
Question
Joe Birra needs to purchase malt for his microbrewery production. His supplier charges $35 per delivery (no matter how much is delivered) and $1.20 per gallon. Joe’s annual holding cost per unit is 35 percent of the price per gallon. Joe uses 250 gallons of malt per week.
a.
Suppose Joe orders 1000 gallons each time. What is his average inventory (in gal)?
b.
Suppose Joe orders 1500 gallons each time. How many orders does he place with his supplier each year?
c.
How many gallons should Joe order from his supplier with each order to minimize the sum of the ordering and holding costs?
d.
Suppose Joe orders 2500 gallons each time he places an order with the supplier. What is the sum of the ordering and holding costs per gallon?
e.
Suppose Joe orders the quantity from part (C) that minimizes the sum of the ordering and holding costs each time he places an order with the supplier. What is the annual cost of the EOQ expressed as a percentage of the annual purchase cost?
f.
If Joe’s supplier only accepts orders that are an integer multiple of 1000 gallons, how much should Joe order to minimize ordering and holding costs per gallon?
g.
Joe’s supplier offers a 3 percent discount if Joe is willing to purchase 8000 gallons or more. What would Joe’s total annual cost (purchasing, ordering, and holding) be if he were to take advantage of the discount?
a.
Suppose Joe orders 1000 gallons each time. What is his average inventory (in gal)?
b.
Suppose Joe orders 1500 gallons each time. How many orders does he place with his supplier each year?
c.
How many gallons should Joe order from his supplier with each order to minimize the sum of the ordering and holding costs?
d.
Suppose Joe orders 2500 gallons each time he places an order with the supplier. What is the sum of the ordering and holding costs per gallon?
e.
Suppose Joe orders the quantity from part (C) that minimizes the sum of the ordering and holding costs each time he places an order with the supplier. What is the annual cost of the EOQ expressed as a percentage of the annual purchase cost?
f.
If Joe’s supplier only accepts orders that are an integer multiple of 1000 gallons, how much should Joe order to minimize ordering and holding costs per gallon?
g.
Joe’s supplier offers a 3 percent discount if Joe is willing to purchase 8000 gallons or more. What would Joe’s total annual cost (purchasing, ordering, and holding) be if he were to take advantage of the discount?
Explanation / Answer
a. and b
Suppose Joe orders 1000 gallons than he has average of 250 gallon per week and he places 9 ordere per year if he orders 1500 gallons once (1500/250=6, 52/6=8.6, hence rounding number of orders will be 9)
c.
K = $35, p = $1.20/gallon
annual h = (35%/year) x ($1.20/gallon) = $0.42/year per gallon
R = 250gallon/week = 250gallon/week x 52week/year = 13,000gallon/year
EOQ = sqrt(2KR/h) = sqrt(833333/0.42)=912.87 gallons.
d..
Weekly demand R = 250 gallon/week
Weekly holding cost h = $1.20*0.35/52 = $0.008077/week
Weekly cost of ordering and holing, C(Q) = (R/Q)K + (Q/2)h = (250/2500)35 + (2500/2)0.008077 = $13.59/week
g.
with a 3% discount, the malt is 1.2*(1-0.03)=$1.164 per gallon.
Weekly holding cost h = $1.164 * 0.35/52 = $0.007835/week per gallon.
Weekly purchase cost= $1.164*250=$291.
Weekly ordering and holding cost = (R/Q)K + (Q/2)h = (250/8000)35 + (8000/2)0.007754 = $32.43/week
Weekly purchasing + ordering + holding cost = $5760 + $69.82 = $323.43/week
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