Question

In: Operations Management

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.

You have calculated an EOQ of 18 bags. At that quantity your supplier's sales price is $4 per bag

The supplier tells you that if you buy in quantities of 25 bags, you will only have to pay $3.75 per bag

If total cost is your primary concern, should you buy in quantities of 25?

Group of answer choices

a) No, because the non-discounted price is $5,480

b) Yes, because the discounted cost is $5,980

c) Yes, because the discounted cost is $5,480

d) No, because the non-discounted cost is $6,210

Expert Solution

Annual demand (D) = 1215 bags

Ordering cost (S) = $10

Carrying cost (H) = 75

a) Economic order quantity (EOQ) = 18 bags

At EOQ the price per unit (P) = $4

At EOQ

Annual ordering cost = (D/EOQ)S = (1215/18)10 = $675
Annual carrying cost = (EOQ/2)H = (18/2)75 = $675
Annual purchase cost = (P × D) = 4 × 1215 = $4860
Total cost at EOQ = Annual ordering cost + Annual carrying cost + Annual purchase cost = $675 + $675 + $4860 = $6210

b) if the order quantity (Q) = 25 bags

Price Per unit (P) = $3.75

At Q

Annual ordering cost = (D/Q)S = (1215/25)10 = $486
Annual carrying cost = (Q/2)H = (25/2)75 = $937.5
Annual purchase cost = (P × D) = 3.75 × 1215 = $4556.25
Total cost at Q = Annual ordering cost + Annual carrying cost + Annual purchase cost = $486 + $937.5 + $4556.25 = $5979.75 or rounded to $5980

So it should be bought in quantities of 25 as it has the lowest total cost

Therefore the answer is option b , Yes, because the discounted cost is $5980

keosha answered 2 months ago

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