Question

JASBike is a company that rents bikes. As a service to their customers, they have a coffee shop on their business premises. They serve 250 000 cups of coffee annually. Coffee is only served in paper cups. The cost per paper cup is R0.80. The company’s inventory carrying cost per paper cup is estimated to be 10% of the cost per cup. The cost per order is calculated at R36.00. You are required to answer all of the questions below.

3.1. Calculate the EOQ. (5)

3.2. What is the number of orders per year? (2)

3.3. Compute the average annual carrying cost. (3)

Answer 1

3.1 EOQ is 15000 cups

3.2 17 orders

3.3 R600

Calculation

1)Economic order Quantity order quantity a company should purchase to minimize inventory costs such as holding costs, shortage costs, and order costs.

Formula for EOQ = √2DS/H

Where D is Annual Demand =250000 cups

S is Carrying Cost=R36

H is holding Cost or Carrying cost=10% of cost per cup =10%×0.80 =R0.080 per cup

EOQ =√(2×250000×36)/0.08

=√18000000/0.08

=√225000000

=15000 cups

2) Average order per year = Annual Demand / Quantity (EOQ)

=250000/15000

=16.67 order

Ie 17 order

3) Average annual carrying cost = Average Inventory × Carrying Cost per cup

Average Inventory =EOQ/2

Average Annual Carrying cost =(15000/2 )×0.080

=(15000/2)×0.080

=7500×0.080

=R600