Question

Constant Supply - B.A. Keroh Cookie Company, Inc. produces a constant supply of Tastee cookies (adjusted for seasonality) to its distributors. Recently the sales team increased their forecast to the distributors. With the updated sales forecast, the operations management met to discuss the need to revise their optimal, or economic, order quantity. Calculate the economic order quantity of cookies that the plant would need to achieve to meet the forecasted supply to the distributors.

The operations supervisor provides you with some of key information.

- There are 12 packages of cookies in each case.

- Each package contains 24 cookies.

- The average annual holding cost per case is $3

- The cost per order is $80.

- The plant operates Monday through Friday and has two weeks per year that it is shut down for maintenance.

- The maximum inventory at the end of each production run is 5% greater than the demand.

- The normal production run is one-ninth of a day.

- Assume daily production of 900,000 cookies per day.

Round calculated values and final answer down the nearest whole number.

Answer 1

Economic Order Quantity (EOQ) = [Demand in units per year (D) * Order Cost per purchase order (S)/Holding Cost per unit per year]^(1/2)

Demand in units per year (D) = 900,000 * 50 * 5

(Assumed 52 weeks a year and 2 weeks of shutdown i.e. net 50 weeks and 5 days of production per week)

1) Demand in units per year (D) = 225000000

2) Order Cost (per purchase order) = 80

Holding Cost per cookies per year = Average annual holding cost per case / Number of cookies in a case /

Holding Cost per cookies per year = 3 / (12 * 24)

3) Holding Cost per cookies per year = 0.01

4) EOQ = [ 225000000 * 80 / 0.01]^(1/2)

EOQ = 1341641 cookies