Question

Sweet Tooth Inc has a thriving PEZ dispenser business. Most of their revenue comes from the variety of refill flavours they offer. Sweet tooth orders Pez refills by the case.

Each case contains 50 packages of Pez Refills and each package contains 10 pez candies. They sell each package for $2 each.

They have found that they sell on average 50,000 candies per month.

All their orders are phoned in, in the interest of speed and efficiency. They have found that the price of the phone call and related costs such as employee’s time, office overhead, etc. average around $20.00 per purchase order.

The annual carrying cost per package totals 10% of the cost per package.

They have also found that a 5-days lead time is required.

Do not mix up candies and packages or months and years.

Answer 1

Annual Demand (A) = 50,000 candies per month * 12 month = 600,000 Candies

let us convert the demand required into Packages,

600,000 candies / 10 Candies per Package = 60,000 Packages

Price per Package (P) = $2.00 per Package

Ordering Cost (O) = $20.00 per order

Carrying Cost (C) = 10% per package per annum = $2.00*10% = $0.02 per package per annum

Economic Order Quantity (EOQ) =

=

=

=

=

= 10,954.45

EOQ = 10,954 Packages

Total Ordering Cost = No. of orders*Cost per order

Total Ordering Cost = (60,000/10,954)*$20

Total Ordering Cost = 5.477 orders * $20

Total Ordering Cost = $109.55

Total Carrying Cost = Average Inventory * C

Total Carrying Cost = (10,954/2)*$0.02

Total Carrying Cost = $109.55

Daily Demand = (50,000 candies per month/30days)/10 candies per package = 166.667 packages per day

Reorder Point = Lead Time * Daily Demand

Reorder Point = 5 days * 166.667 packages per day

Reorder Point = 833.333 packages

***********************************************************************************************************************************

Please like if you got your query solved, reach back to us via comment if any query to understand. All the Best!