Question

The IBP Grocery orders most of its items in lot sizes of 10 units. Average annual demand per side of beef is 720 units per year. Ordering costs are $25 per order with an average purchasing price of $100. Annual inventory carrying costs are estimated to be 40% of the unit cost.

Required:

a.             Determine the economic order quantity

b. Determine the annual cost savings if the shop changes from an order size of 10 units to the economic order quantity

c. Since the shelf life is limited, the IBP Grocery must keep the inventory moving. Assuming a 360-day year, determine the optimal lot size under each of the following:

(1) a 20-day shelf life and (2) a 10-day shelf life.

Answer 1

a. EOQ=

Where: a= Variable cost of placing an order

D= Demand in units for a given period

k= Carrying cost of one unit for the same time period used for D

So EOQ=

= 30 units

b. Current 10 unit order;

Ordering costs(25*720/10)=1800

Carrying costs[100*0.40*(30/2)] = 200

Total = $2000

EOQ 30 unit order;

Ordering costs(25*720/30)=600

Carrying costs[100*0.40*(30/2)]=600

Total = 1200

Annual Savings = 2000-1200=$800

c. Average Daily Demand=720/360=2 per day

Average Daily Supply in EOQ=30/2=15 days

1.20 day shelf life allows for up to 40 units(20*2),EOQ is acceptable

2. 10 day shelf life allows for up tp 20 units (10*2),EOQ is not acceptable.