Question

A bakery buys flour in 25-pound bags. The bakery uses 1,215 bags a year. Ordering cost...

A bakery buys flour in 25-pound bags. The bakery uses 1,215 bags a year. Ordering cost is $10 per order. Annual carrying cost is $75 per bag.

Determine the economic order quantity.

What is the average number of bags on hand?

How many orders per year will there be?

Compute the total cost of ordering and carrying flour.

If holding costs were to increase by $9 per year, how much would that affect the minimum total annual cost?

Business   Operations-Management   
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Homework Answers

Answer #1

EOQ = sqroot {(2*Annual Demand*Ordering Cost)/(Annual Carrying Cost)}

= Sqroot{(2*1215*10)/75}

= 75 units

Average Number of bags on hand = EOQ/2

= 18/2

= 9

Number of annual orders = AnnualDemand/EOQ

= 1215/18

= 67.5

Ordering Cost = Number of Orders*Ordering cost per order

= 67.5*10

= $675

Carrying Cost = Average Inventory*Carrying cost Annually

= 9*75

= $675

Total cost = $675 + $675

= $1350

If holding cost increases by $9

EOQ = sqroot{(2*1215*10)/84}

= 17

Ordering Cost = Number Of Orders * ordering Cost per order

= (1215/17)*10

= $715

Carrying Cost = Average Inventory * Carrying cost Annually

= (17/2)*84

= $714

Total cost = $1428

It will affect the cost by 1428-1350

= $78

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