Question

A bakery buys sugar from a big distributor to use in baking cakes. Typically, they use 3663 bags ...

A bakery buys sugar from a big distributor to use in baking cakes. Typically, they use 3663 bags of sugar in a year. The price of sugar is typically $14 per bag. The cost to the bakery for placing an order is $26, and the annual carrying cost is $17 per bag. The distributor has offered the bakery the following volume discount schedule:

Order Size	Discount rate on the original price
1--449	0 percent
450--799	5 percent
more than 800	10 percent

We are trying to find how many bags of sugar should the store order, whenever they place a new order of sugar. Assume 364 days a year and 52 weeks a year.
IMPORTANT: Note, the discounts off of original price are reported. You need to calculate the actual prices.

1. If we ignore the discounts, how many bags of sugar should we order?
2. Fill in the blanks

Order Quantity	Unit Price to Pay	Total Annual Inventory Related Cost
Quantity from EOQ model
Enough to get 5 percent discount
Enough to get 10 percent discount

3. Based on this quantity discount information, how may bags of sugar should the store order?  
4. How often (in "days") should the bakery order?  

Answer 1

SOLUTION

If we ignore the discounts, how many bags of sugar should we order?

This is the Economic Order Quantity, EOQ

Annual demand, D = 3,735 bags
Ordering cost, K = $29
Unit carrying cost, h = $20 per annum
Cost of purchase, C = $10 per bag

EOQ = (2.D.K / h)^1/2 = sqrt(2*3735*29/20) = 104 bags

Based on this quantity discount information, how may bags of sugar should the store order?

The optimal order quantity is EOQ = 104 bags only with a minimum cost of $39,431.49.