Question

In: Operations Management

The Always Fresh Grocery Store carries a particular brand of tea that has the following characteristics:...

The Always Fresh Grocery Store carries a particular brand of tea that has the following characteristics:

Sales = 8 cases per week

Ordering cost = $10 per order

Holding cost factor = 20% per unit per year

Unit cost = $80 per case

The Always Fresh Grocery Store is offered a discount by its supplier:

Order size Item cost

0-49 $80

50-99 $76

100+ $74

a. Should the grocery store take the discount offer?

b. If they decide to take the discount offer, how many units they should order at one t

Expert Solution

1. Yes, we should take the discount because the total annual cost with the discount is less than the total annual cost without the discount.

2. We should order 100 units at a time.

DEMAND = 416

ORDERING COST = 10

HOLDING COST % = 20 %

EOQ = SQRT(2 * DEMAND * ORDERING COST / HOLDING COST)

ANNUAL HOLDING COST = ADJUSTED EOQ / 2 * HOLDING COST PER UNIT

ANNUAL ORDERING COST = (ANNUAL DEMAND / ADJUSTED EOQ) * ORDERING COST

ANNUAL MATERIAL COST = ANNUAL DEMAND * OFFERED PRICE PER UNIT

TOTAL COST OF INVENTORY = ANNUAL(HOLDING + ORDERING + MATERIAL)

OPTIMAL ORDER QUANTITY = 100

ASSOCIATED COST = 31566

NO.	LOWER LIMIT	UPPER LIMIT	PER UNIT PRICE	ADJUSTED HOLDING COST	EOQ	ADJUSTED QUANTITY	ANNUAL HOLDING COST	ANNUAL ORDER COST	ANNUAL MATERIAL COST	TOTAL COST OF INVENTORY
1	0	49	80	16	23	23	23 / 2 = 184	416 / 23 * 10 = 180.87	416 * 80 = 33280	184 + 180.87 + 33280 = 33645
2	50	99	76	15.2	23	50	50 / 2 = 380	416 / 50 * 10 = 83.2	416 * 76 = 31616	380 + 83.2 + 31616 = 32079
3	100	& more	74	14.8	24	100	100 / 2 = 740	416 / 100 * 10 = 41.6	416 * 74 = 30784	740 + 41.6 + 30784 = 31566

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keosha answered 1 year ago

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